Cameron Blanks from Pacific Equity Partners speaks to James Dunn at The Inside Network’s Alternatives Symposium in Melbourne on looking through the cycles and catalysing growth. The Inside Adviser
Duncan Farley from RBC Bluebay Asset Management speaks to Giselle Roux at The Inside Network’s Alternatives Symposium in Melbourne on macro trends that matter more. The Inside Adviser
‘Golden age” for quant in China
“We all think we know China, but you won’t think of China the same way after this presentation” explained James Dunn, host of The Inside Network’s Equities and Growth Assets Symposium held in April. He was introducing Lewis Prescott, international CEO of Mingshi Investment Management, a multi-billion-dollar quantitative equity manager that recently launched in Australia.
“As advisers, and asset allocations, what you are looking for your clients, for portfolios, for your career, is differentiation,” Prescott said, while seeking to highlight the rare opportunity available in Chinese equities today. He was quick to point out the many challenges faced by part-time or global equity managers investing in the region, in which there is a significant dearth of research.
The opportunity for “meaningful alpha generation is real” in China A-shares, Prescott argued, driven by three key factors: diversification, liquidity, and inefficiency. In a world where forecast returns from equity benchmarks have never been lower, and large super funds are being forced closer to index-tracking, alpha has rarely been more powerful.
Not only is the diversification real, but it is also unique, explained Prescott, pointing to the A-shares’ very limited correlation with any major global equity market index. Similarly, the liquidity of the S&P/ASX200 pales in comparison to the US$211 billion ($285 billion) in daily volume traded on the China A-share market. The third, well-appreciated fact is the extremely inefficient nature of the market, but in this case, the real opportunities lie in the first two.
“One of the key reasons for the diversification benefit is the unique structure of China A, in which about 70 per cent of daily volume is driven by ‘mum and dad’ investors, by which I mean, literally, someone trading stocks from home, not unlike the meme stock events that occurred in 2021 but on a significantly larger level,” said Prescott. “By comparison, the level of retail trading in Australia is just 15 per cent per day.”
This has important implications for the way the market trades and interacts on a daily basis, but ultimately with the persistence and success of so-called ‘systematic’ or ‘factor’ based strategies; that is, strategies that utilise data analysis and computing to identify trading signals and trends. While factors like growth and momentum have been the free ride in the US and Australia, it is a very different story in China A; with a significantly shorter investment timeframe warranted.
One of the most significant ‘edges,’ however, comes from the “sheer lack of size and scale” on the short side of the market, Prescott said. It is here, where experienced local managers are able to leverage the under-supply of China A-shares actually available for shorting, which on most days is less than 10 per cent of total volume, to the benefit of investors. “The sheer size, scale and liquidity of the opportunities means it offers the opportunity for ‘meaningful alpha in meaningful size’ for those able to negotiate the high barriers to entry, operating and trading costs,” he said.
For all of those reasons, for those seeking a true differentiator, systematic investing in China “is in a golden age,” concluded Prescott.
