Fund Insights: AIA Managed Funds and the Chinese Regulatory Crackdown

This addresses client concerns regarding the Evergrande Group debt default and the regulatory crackdown in China.  Many clients hold exposure to the region, and this update covers both the original 2021 position and what has happened since.

Chinese regulators introduced widely publicised restrictions and rule changes across a wide range of sectors and companies.  These rattled Chinese equities and extended to Evergrande Group, one of China’s three largest property developers.  Evergrande built its name in residential property, running more than 1,300 projects across over 280 cities in China.  By late 2021, Evergrande had warned investors of cash flow problems, stating it could default without immediate access to fresh capital.

Evergrande disclosed in an exchange filing that it was struggling to find buyers for some of its assets, amid a glut in the Chinese residential property market.  Its share price had already fallen more than 80 per cent that year.  Fitch and Moody’s both downgraded Evergrande’s credit rating in early September.  The debt problems triggered fears over the wider impact a collapse could have on the Chinese economy.

AIA’s Fund Exposure at the Time

AIA Elite Funds and AIA Global Dynamic Income Fund carried no exposure to Evergrande Group.  AIA Elite Funds run diversified, actively managed positions across four core underlying funds, three global equity funds and one global fixed income fund, none holding any Evergrande exposure.  The underlying funds were the AIA New Multinationals Fund, the AIA Global Quality Growth Fund, the AIA Diversified Fixed Income Fund, and the AIA Global Multi-Factor Equity Fund.

Given rising market volatility and caution over China’s regulatory clampdown, tactical exposure to Asia excluding Japan and Greater China equities was reduced to zero by the final week of July 2021, following months of prior reductions.

AIA Global Dynamic Income Fund ran a similarly diversified structure across three core underlying funds, the AIA Diversified Fixed Income Fund, the AIA US High Yield Fund, and the AIA Equity Income Fund, none carrying Evergrande exposure.  This fund was actively managed to deliver stable quarterly income alongside consistent long-term total returns.  AIA Investment Management increased allocation to the AIA Equity Income Fund over time, using higher volatility to generate healthy premiums from writing call options.  As of September 2021, the fund’s annualised dividend yield stood at 5.70 per cent.

At the time, AIA’s stewardship and focus on long-term investing had carried portfolios through prior market disruptions.  AIAIM did not expect a broad-based impact on global equities, and maintained an overweight position relative to fixed income.  Chinese equities traded at attractive valuations, though AIAIM remained cautious pending clarity on the government’s policy direction, judging a full bailout of Evergrande unlikely and holding a neutral stance on Chinese equities while continuing to evaluate macro and policy developments, alongside US-China tensions over cross-border capital markets, data, and national security regulation.

Fund performance as of 31^st August 2021, annualised since inception: the AIA Elite Adventurous Fund returned 22.16 per cent against a benchmark of 17.84 per cent.  The AIA Elite Balanced Fund returned 14.42 per cent, and the AIA Global Dynamic Income Fund returned 12.22 per cent, against a balanced benchmark of 13.57 per cent.  The AIA Elite Conservative Fund returned 9.52 per cent against a benchmark of 9.46 per cent.  These figures were calculated in Singapore dollars on a bid-to-bid basis, with net dividends reinvested, before fees.

What Happened to Evergrande

A Hong Kong court ordered Evergrande’s liquidation on 29^th January 2024.  The company failed, across eight adjournments since a 2022 winding-up petition, to produce a viable restructuring plan for liabilities exceeding US$300 billion, roughly C¥2.39 trillion yuan.  Evergrande was delisted from the Hong Kong Stock Exchange on 25^th August 2024.  Nearly one million Chinese households had already bought apartments the company no longer had the means to finish.

Accountability eventually reached the auditors.  Chinese regulators suspended PwC Zhong Tian’s audit activities in mainland China for six months in September 2024, alongside a record fine of C¥441 million, about US$62 million, for failures in overseeing Evergrande’s accounts.  This signals Beijing treating the crisis as a failure of financial oversight, not merely one company’s mismanagement.  Country Garden, once China’s largest developer, defaulted separately, confirming the crisis ran across the sector rather than sitting isolated in one firm.

AIA’s Original Position Held Up

AIA’s zero exposure to Evergrande in 2021 remained zero through the eventual liquidation.  AIA Investment Management’s decision to cut tactical exposure to Asia excluding Japan and Greater China equities to zero by July 2021, taken before the liquidation order existed, protected client capital from what became the largest real estate bankruptcy in Hong Kong’s history.

China’s property crisis did not resolve quietly.  It produced the largest developer bankruptcy in the market’s history, a six-month regulatory suspension against one of the world’s largest audit firms, and a fine large enough to signal consequence rather than a symbolic gesture.  AIA’s underlying funds carried no exposure to any of it.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code