Fund Insights: AIA Managed Funds, the Chinese Market & Evergrande Group

This is in response to client concerns regarding the Evergrande Group debt default, and the current regulatory crackdown in China.  Since many of you have funds invested in the region, this post is to address those concerns. 

In recent months, there have been much-publicised restrictions and rule changes on a wide range of sectors and companies by the Chinese regulator.  These have rattled the Chinese equities market, extending more recently onto Evergrande Group, one of China’s top 3 largest property developers.  Evergrande made its name in residential property with more than 1,300 projects in more than 280 cities across China.  In the recent weeks, Evergrande has issued warnings to investors of cash flow issues, saying that it could default if it is unable to raise money immediately. 

Evergrande also disclosed, in an exchange filing, that it was having trouble finding buyers for some of its assets.  There is a glut in the Chinese residential property market.  Over the course of the year, its share price has dropped more than 80%.  In early September, rating agencies Fitch and Moody’s downgraded Evergrande’s credit ratings.  When it rains, it pours.  Evergrande’s debt problems have triggered fears over the impact its potential collapse could have on Chinese economy. 

AIA Elite Funds and AIA Global Dynamic Income Fund do not have any exposure to Evergrande Group.  AIA Elite Funds are well diversified and actively managed across four core underlying funds, comprising of three global equity funds, and one global fixed income fund.  All the underlying funds below do not have exposure to Evergrande.  The underlying funds are:

1. AIA New Multinationals Fund

2. AIA Global Quality Growth Fund

3. AIA Diversified Fixed Income Fund

4. AIA Global Multi-Factor Equity Fund 

Given increasing market volatility and caution towards regulatory changes and clampdown in China, in the final week of July, tactical exposures to Asia excluding-Japan and Greater China equities were reduced to zero after reduction in exposure in the past few months. 

AIA Global Dynamic Income Fund is well diversified and actively managed across three core underlying funds.  All the underlying funds below do not have exposure to Evergrande Group.  The underlying funds are: 

1. AIA Diversified Fixed Income Fund

2. AIA US High Yield Fund

3. AIA Equity Income Fund 

Similarly, the AIA Global Dynamic Income Fund is actively managed to deliver stable quarterly income as well as consistent total returns in the long run. 

AIA Investment Management (AIAIM) has increased the allocation to AIA Equity Income Fund over time to leverage on higher volatility to generate healthy premiums from writing call options.  As of September 2021, the annualised dividend yield of AIA Global Dynamic Income Fund is 5.70%. 

Despite having encountered different economic and market events which may have affected short-term performances, AIA stewardship and focus on long-term investing and staying invested have helped throughout this journey.  Looking ahead, AIAIM does not expect broad based impact to global equities and as such they continue to hold an overweight position relative to fixed income.  Whilst Chinese equities are trading at attractive valuations, we are keenly following developments and visibility into the policy stance and will react accordingly once clarity emerges. 

At this stage, markets have little visibility on what will be the next regulatory action, be it the scale of the next tightening, or sector which will be impacted.  It is also unknown if the Chinese authorities will step in to save Evergrande Group or steps that may be taken to alleviate the situation.  In my view, it is unlikely that the Chinese government will effect a bailout.  As such, AIAIM’s view on Chinese equities remains neutral for now, as they continue to evaluate the macro and policy developments in China.  Against this backdrop, the US-China tensions is also worth monitoring, particularly on cross-border regulations on capital markets and data/national security.  On a related note, the rest of the AIA ILP Sub-Funds do not have any exposure to Evergrande as well. 

The following is a summary of fund performance, from AIA Investment Management, Morningstar, as of 31^st August 2021.  These are the annualised returns since inception. 

AIA Elite Adventurous Fund 22.16%

Adventurous Benchmark 17.84% 

AIA Elite Balanced Fund 14.42%

AIA Global Dynamic Income Fund 12.22%

Balance Benchmark 13.57% 

AIA Elite Conservative Fund 9.52%

Conservative Benchmark 9.46% 

The performance of the fund is in Singapore dollars on a bid-to-bid basis with net dividends reinvested, without taking into consideration the fees and charges payable through deduction of premium or cancellation of units.