Page 20 - DIY Investor Magazine | Issue 31

BRUNNER INVESTMENT TRUST PLC A CRACK IN THE CHINA? The following is an extract from the latest instalment of Connected Investor, the podcast from the Brunner Investment Trust, featuring host Joe Lynam discussing some of the issues of the day with the Trust’s lead portfolio manager, Matthew Tillett. Joe Lynam (JL): We’re going to take a deeper look at China, where there appears to be a big shift by the ruling Communist party this year. For three decades it looked the other way as some citizens became billionaires, so long as jobs were created and no one strayed into politics. Suddenly that blind eye has opened, and we’ve seen swift action against high profile millionaires and even entire sectors within the Chinese economy. President Xi Jinping refers to it as his ‘common prosperity drive’. What do you make of it, Matthew? Matthew Tillitt (MT): I think the government has become increasingly concerned, not so much with its pace, but with the path of economic growth in China; it’s become unbalanced, accentuating inequalities in society. They have a tacit understanding with the population that they stay in power and everybody gets wealthier over time and living standards improve. If it starts to look like that’s only happening for segments of the population, the lower and middle classes become disaffected. That’s potentially a major problem for them and their mandate to rule the country; I think that’s what’s behind some of these rulings and changes in policy and regulation. JL: But to the outside world, Matthew, it looks as if China is tilting away from being a relatively open, albeit politically Communist country, in order to protect the ordinary man and woman on the street. MT: There definitely is an element of that going on, although how open was it before really? Government has always been in control of pretty much every sector and really every company as well. Even big technology companies that you can invest in as Western investors, when you buy those shares via ADRs (American Depository Receipts), or even listings in Hong Kong, most are structured such that you don’t have property rights in the way that you do buying a share in the UK or in the US. JL: You don’t own the shares that you’re buying? MT: They use complex structures called Variable Interest Entities, which work like a tracker share in that the shares track the value of the company, but there’s no way of enforcing your right to that property. Investors have been prepared to look through this on the assumption that the Chinese government would never expropriate property from foreign investors. JL: And can we continue to make that assumption, Matthew? MT: They need to find a balance because they need the outside world as well; never say never, but if government started doing things like that, they would have a real problem attracting inward investment, buying goods and services from around the world, using technologies from other parts of the world, which they want, and need to do. They are integrated into the global economy, so I think it’s unlikely that would happen, but it leads into a broader question around investing in China and how one takes these factors into account. In Brunner we’ve not typically had much exposure to China; not because we haven’t looked hard or haven’t been interested, but because we’ve always struggled with this issue and particularly governance - it’s hard to find companies that have the standards that we look for. This episode has shown that you don’t have the same protections you have in other parts of the world and therefore if you’re going to invest you’ve got to put a discount on it; the question is how much of a discount. Before this started there wasn’t much, now there is a very big discount. DIY Investor Magazine · Nov 2021 20