In an investor update, the manager said that while he was still underweight compared to the benchmark, allocation to banks had increased to around 16%.
‘One reason for the increase is the depressed valuation. Price to book multiples were about 0.6 when we started to invest a couple of months ago. The second reason is meaningful improvement in asset quality within several conservative banks for example ICBC and the Bank of China. We noticed that conservative banks have started to stabilise.’
'We made money by increasing the exposure to banks in the past couple of months. Having said that we are still underweight the banks. Our exposure at the end of September is about 16% versus the benchmark of 17%. Part of the reason is that we remain cautious on the interest rate revisions,’ Yao said.
The Industrial and Commercial Bank of China (ICBC) is the fourth largest holding in the fund at 6.19%. Bank of China is the fifth largest holding at 5.68%. Yao added that both of these banks had entered the top ten holdings over the past few months.
Away from financials, Yao has a 23.58% exposure to the China A-share market, which is an off-benchmark position. The sector has recently underperformed significantly, but Yao said that there are some good long term opportunities in the A-shares market.
The earnings growth of many of the companies are in the mid-teens and Yao said the valuations were reasonable. Some exporters are experiencing an earnings boost through the devaluation of the renminbi.
‘We are focused on the companies, most of them very boring, with a solid top line bottom growth with attractive valuations,’ Yao said.
‘For us the most important thing is individual opportunities. For example Media Group, which is one of the two largest home appliance producers in China. The CEO has been with the company for more than 30 years with a long term track record and the company exports almost 30% of its products to the US and other countries.’
Over three years to the end of September 2016 the Neuberger Berman China Equity fund returned 36.15% in US dollar terms. This compares to a rise of 15.32% by its Citywire-assigned benchmark the MSCI Zhong Hua TR USD.