Common Prosperity

Michael Rudd, CFA | President, CEO and Portfolio Manager

Regular China watchers will know that there have been some interesting developments with respect to government regulation that have impacted the stock market over there. You may have heard a number of financial pundits declare that China is now “uninvestable”. We thought we would offer our views. The Chinese government has adopted the mantra of “Common Prosperity”, which is an agenda to promote more sustainable and equitable growth by regulating private businesses in certain industries that have become too powerful. The government has said it will pursue “quality growth” rather than “rapid growth”, which means a shift from stimulating growth through infrastructure, real estate, and resource development towards supporting innovation with next generation computer hardware, energy, and environmental technology.  The table below was created by Goldman Sachs and concisely captures the goals of the government.

It appears that they will place constraints on profitability in certain industries and attempt to reign in companies that have grown too big or did not engage the government properly. In our view, this is not unlike issues that western governments face. The glaring difference is the forceful nature of the implementation and the lack of traditional messaging that markets are accustom too. Think about the attempts to limit Alphabet, Facebook, Microsoft and AT&T over the years. The goals are somewhat similar. It is just that the abrupt path that the Chinese government has taken has spooked investors.

“This means that” we remain long-term China bulls. The Pathfinder International Fund has a healthy exposure to Chinese companies (32.4% by revenue, 23.9% by listing). While we expect the potential for volatility to continue as investors stretch to understand new regulations and the government evolves its communication style, we believe that China is one of the few areas that currently offers good value with the potential for future growth. We will continue to adjust our exposure to both cheap stocks, and to those special situations that will be promoted by the government.

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Sources: Pathfinder Asset Management Limited

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*All returns are time weighted and net of investment management fees. Returns from the Pathfinder Partners’ Fund and Partners’ Real Return Plus Fund are presented based on the masters series of each fund. The Pathfinder Core: Equity Portfolio and The Pathfinder Core: High Income Portfolio are live accounts. These are actual accounts owned by the Pathfinder Chairman (Equity) and client (High Income) which contain no legacy positions, cash flows or other Pathfinder investment mandates or products. Monthly inception dates for each fund and portfolio are as follows: Pathfinder Core: Equity Portfolio (January 2011), Pathfinder Core: High Income Portfolio (October 2012) Partners’ Fund (April 2011), Partners’ Real Return Plus Fund (April, 2013), and Partners’ Core Plus Fund (November 2014).

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