|Share Class reference currency||USD|
|Total Assets (all classes) in mn||USD 190.53||30.04.2021|
|Assets (share class) in mn||USD 3.65||30.04.2021|
|Number of positions||–||–|
Lusate Inc. – Event Convexity is an actively managed UCITS portfolio. Its strategy focuses on building deeply asymmetric risk profiles around events using intra-capital structure dislocations. The investment approach seeks to enhance traditional fundamental event driven analysis with the convexity available from the combination of equities, credit and related financial derivatives. The strategy employs a methodical and disciplined investment process, which begins with unique screening and analysis systems to filter the universe of company events and dislocations, and results in a concentrated portfolio centered around trade construction. Risk philosophy is at the core of the Fund, embedding downside protection into all phases of the investment process and portfolio construction, further enhanced by the oversite of LOIM’s dedicated risk management team.
The Fund has been implementing the Event Convexity Strategy since January 11th, 2019.
In April, Lusate Inc.–China High Conviction P share class in USD increased 2.0% compared to its benchmark (MSCI China All Shares Index) which rose 2.3%, underperforming by 34 bps over the month. However, for the first four months of this year, the Fund was up 3.7% compared to the benchmark’s 0.8%, outperforming by 294 bps. Since inception, the Fund has returned +20.2% compared to the benchmark’s 14.3% over the same period, outperforming by 588 bps.
The Chinese equity market stabilised in April, underperforming most developed market indices (Stoxx 600 +4.8%, S&P +5.3%, all in USD). The major drag continued to be Chinese ADRs, which barely changed in the month, rising just +0.8% as measured by the S&P/BNY Mellon China ADR Index. In terms of sector performance, Healthcare recovered the most with double-digit returns while Real Estate and Utilities recorded losses. Overall, we have seen encouraging first quarter results from A-share listed companies with solid end demand, and the quarterly results of Chinese ADRs and internet companies are scheduled for May, which are the next major data points for investors to watch.
In April, the Politburo meeting stated that the economic recovery is still uneven. Currently it is still at an early stage of the transition from investment/exports growth drivers to consumption-related drivers. As a result, we expect that the Chinese government will maintain the stability of macro policy, and risk of overtightening is rather low. In addition, as illustrated by the local SOE default late last year, local financial risks can spill over to the broader market and credit risks are increasingly correlated with regional fiscal soundness. We are assured that the government is fully aware of such risks and is more cautious about local SOEs’ bond default and will closely monitor potential significant spillovers of local risks.
That said, we also see several positive bottom-up developments in China. The preliminary Chinese GDP figure for the first quarter of 2021 showed 18.3% growth on a year-on-year basis, due to both the low base effect caused by Covid-19 last year and the strong economic recovery this year. In addition, the per capita disposable income of residents in China for Q1 2021 was RMB 9,730, a nominal increase of 13.7% over the same period of last year. From January to March, the total retail sales of social consumer goods reached RMB 10.5 trillion, a year-on-year increase of 33.9%. All of the underlying macro data have shown that the Chinese economy has been solid and consumer consumption has been strong.
During April we initiated positions in the solar energy industry as we are bullish on the long-term outlook for solar energy demand globally, and thus we started investing in some local Chinese companies with leading technology and global footprints. Meanwhile, we also increased our investment in the Healthcare sector as we see value starting to emerge after the previous market correction, particularly in private hospitals and online healthcare providers with limited exposure to government reimbursement programmes. In addition, we started building positions in a leading semiconductor foundry company which we believe will maintain its leading node advantage over competitors for the next few years, especially when the overall global supply is tight. Last but not least, we further increased our conviction on a leading Chinese private bank after its solid first quarter result showed encouraging earnings growth.
TOP CONTRIBUTORS/DETRACTORS TO RELATIVE PERFORMANCE
The top performance contributor was Li Ning. Its share price was up 25.5% in the month of April as the company reported above 80% year-on-year retail sales growth for the first quarter of this year, which beat Street expectations. Chinese consumers continued to like its product design and quality, and we are encouraged to see that the brand is particularly popular among young Chinese consumers.
The CATL share price increased 20.5% as the company released a set of solid first quarter results with 112% year-on-year revenue growth and 160% year-on-year net profit growth. Its margin was well protected during a period when raw material costs rallied substantially, which has provided further proof of its strong positioning in the supply chain.
NetEase went up by 10.8% as expectations started to build on its pipeline of games, including famous IP names like Harry Potter, for release in the summer, and Diablo Immortal, being released late this year.
The top performance detractor was Tencent Music which dropped by 15.0% during the month as the alleged block trades continued in April after a family office’s liquidation of its holdings in March. Management’s comments on increasing investment in long-form audio also dampened near-term sentiment.
CCB-A corrected by 8.4% as the market lowered its expectations for net profit growth and there was a style rotation from Value to Growth, a reversal from last month. CCB-A’s Q1 2021 results were solid but unexciting, with net profit up by 2.8%. We have cut our position due to the lack of near-term
Ping An-A corrected by 6.1% on lackluster premium sales after its jump-start campaign. We observed weakness for Chinese insurers across the board in April. The stock is trading at record low valuations and we think the risk-reward is attractive although there is a lack of short-term catalysts. We continue to hold the position as a defensive compounder in the near term and expect a turnaround to happen later in the year.