创新逐渐成为经济增长的关键要素——＂中国山寨＂成功转型为＂中国制造＂，而亚洲地区的整体趋势亦如是。然而，目前为止，市场上仍缺乏简单有效的方法投资亚洲创新机遇。本篇文章，我们将讨论亚洲创新发展的现况即行业影响，并介绍Premia与FactSet合作推出的亚洲创新科技策略，亚洲创新科技指数为投资者系统化、精确地捕捉亚洲创新科技大趋势——数位转型、生物科技与医疗创新、人工智能与机械自动化。

Jun 29, 2018

The indices followed by our 2 Premia China A-shares ETFs (2803.HK and 3173.HK ) went through their first rebalance since the ETFs launched late last year. In this post, we recap the rebalance, the resulting exposure, the newest additions and everything else you need to know.

Jun 15, 2018

MSCI China A-shares inclusion is happening this week, but there are still a lot of global investors who hesitate to add China A to their portfolios. Over the last 12 months we’ve heard multiple reasons cited for this aversion to A-shares. In this post, we debunk the 10 most popular myths and highlight why the rational investor not only can, but should, allocate to A-shares, perhaps even ahead of MSCI’s multi-year inclusion plan.The 10 myths behind A-shares avoidance:1. China exposure is already covered via Chinese equities in HK & the US (offshore)2. All quality companies are listed offshore3. A-shares are trading at a premium to offshore Chinese equities4. A-shares have poor corporate governance5. A-shares are mainly SOEs whose interests do not align with shareholders6. A-shares add volatility only, without producing any long-term performance7. Renminbi is too volatile and always depreciates8. Rational investors should steer clear due to A-shares’ massive retail participation9. A-shares investment requires quotas and other complex processes 10. There isn’t enough research coverage.1. China exposure is already covered via Chinese equities in HK & the USFirst, the A-shares market has 3x the number of stocks available offshore. The daily turnover is 5x greater than both H-shares (HK) and ADRs (US) combined. In other words, the onshore market is the primary market, no matter what the global community may think. Some sub-sectors are even unique to the A-shares market only, namely aerospace and defense, Chinese distillers, entertainment & publishing, cable & satellite, precious metals, and many others. They are listed only onshore and include companies that many investors should be reviewing as part of their allocation to China in the 21st century. Conclusion: MythSource: Bloomberg as of May 21, 20182. All quality companies are listed offshoreFirst and foremost, this doesn’t hold up to scrutiny. China A-shares score similarly to many other global markets on metrics such as profit margin, ROA, ROE and current ratio. In fact, on all but ROA, China A-shares have a bigger quality exposure than MSCI World. In addition, many industry leaders are only listed in either Shanghai or Shenzhen, not offshore: Jiangsu Hengrui (pharmaceuticals), Midea (home appliances), Kweichow Moutai (beverages), China International Travel Services (leisure), and Shenzhen Inovance (automation), etc. If investors keep excluding A-shares from their radar screens, then they exclude many of the most recognized domestic consumer brands. Beyond the existing onshore listings, the launch of China Depositary Receipts (CDRs) in the coming months will encourage some offshore listed national champions to return home. In addition, the China Securities Regulatory Commission (CSRC) is speeding up IPOs of qualified unicorn companies in biotechnology, cloud computing, artificial intelligence, and high-end manufacturing. By then, the domestic markets will look even more complete and attractive. Conclusion: MythSource: Bloomberg as of May 21, 20183. A-shares are trading at a premium to offshore Chinese equitiesA-shares are trading at a premium? Yes, but only if looking at dual-listed A/H shares (the companies that are listed both onshore and offshore). The overall premium of dual-listed A-shares is ~20% over their dual-listed H-shares counterparts. But that is only part of the story.When looking at the overall market, the story is quite different. CSI 300, the main benchmark for China A, is trading at ~13.0x of forward PER versus MSCI China, the main benchmark for offshore Chinese equities, which is trading at ~13.4x. A-shares have a lower Price to Book and a higher Dividend Yield as well. Basically, both onshore and offshore China plays are trading at similar valuations. But that’s assuming mainstream benchmarks. At Premia, we follow the CSI Caixin Rayliant Bedrock Economy Index for our traditional economy ETF, 2803 HK (product page). A-shares investment looks even more attractive from a valuation point of view, when utilizing our approach. Conclusion: Partial MythHere’s another way to look at the dispersion. Mid/small-caps are currently trading in the ~10th-20th percentile in valuations relative to their own history. In contrast, mega/large-caps are trading in the 50th-60th percentile vs the last 10 years. Over a shorter horizon, mega-caps in particular look rich in the 75th-85th percentile vs the last 3-5 years.Source: Bloomberg as of May 21, 2018; China A: CSI300; Offshore China: MSCI China; Bedrock China A: CSI Caixin Rayliant Bedrock Economy4. A-shares have poor corporate governanceCorporate governance issues are not new or unique to China. They exist in every emerging market and developed market. Think about the recent global scandals such as Facebook’s leak of personal data, Samsung’s bribery issues resulting in the heir going to jail, the collapse of Lehman Brothers and AIG during the financial crisis, etc. The Chinese government and regulators have been stepping up efforts to ensure that a fit and proper corporate governance is in place for listed companies. A cumulative voting mechanism to protect minorities’ interests, a minimum proportion of independent directors and International Financial Reporting Standards have all been gradually introduced in the past. Even now, one could argue that corporate governance in China is no worse than in other EM markets, and is in fact getting better as the government has made tackling the issue a priority. Increasing foreign ownership can only help push the market in the right direction. Conclusion: Partial Myth5. A-shares are mainly SOEs whose interests do not align with shareholdersA-shares are mainly SOEs whose interests do not align with shareholdersAmong 3,608 listed companies in Shanghai and Shenzhen, there are only ~1,000 central or local SOEs, accounting for less than one-third of the total number of A-shares. Investors have plenty of choice when putting their money in non-SOE companies. That said, it is also overly simplistic to say that all SOEs are in bad shape, mismanaged or over-geared without proper due diligence. Corporate governance goes hand in hand with SOE reform, a priority for the government going forward. Some SOEs like Gree and Shanghai Auto already deliver good operating results and manage to outperform the broader market. Effective screening tools for selecting the right stocks is important, regardless of their SOE or non-SOE status. For more info on our approach, click here. Conclusion: Myth6. A-shares add volatility only, without producing any long-term performanceGiven the nature of emerging markets, China A-shares do have higher volatility compared to most developed markets such as the US, Europe and Japan. However, A-shares have also outperformed those markets over the last ~15 years. So while the volatility is higher, so too is long-term return, in line with modern portfolio theory. More recently, volatility has decreased and we expect it to trend down as the market becomes more institutionally driven. Besides, looking at volatility only without considering correlations is a largely irrelevant asset allocation exercise. Adding A-shares into one’s portfolio helps increase diversification due to the low correlation of A-shares with other markets. Conclusion: MythSource: Bloomberg, Premia Partners, as of December 31, 20177. Renminbi is too volatile and always depreciatesFollowing the internationalization of the renminbi, the IMF voted to designate the renminbi as one of several main world currencies, thus including it in the basket of special drawing rights. An ongoing renminbi devaluation for the sake of increased exports is a misleading accusation. China is in the middle of transforming its economy from being export-oriented to domestically focused. Currency depreciation does not make long-term sense in that context. This is one of the reasons why the basket of currencies maintained by the State Administration of Foreign Exchange has been expanded to all their trading partners, rather than just USD. But all these points pale in comparison to an even simpler way of proving this concern false – the data. The renminbi appreciated by more than 7.4% in USD term in the past 12 months. Conclusion: MythSource: Bloomberg as of May 21, 20188. Rational investors should steer clear due to A-shares’ massive retail participation90% of daily turnover comes from individual investors in China A whilst less than 10% in the US. This is true. Similar to individual investor behavior in developed markets, retail flows in China lean toward stocks that are small, growth biased, lottery in nature and high beta, etc. These elements lead to higher volatility and unpredictability. That said, retail investors in China offer opportunities for professional investors to outperform, just like in developed markets. Inefficiency and behavioral errors create opportunity for capturing alpha, both through capable active management and through well-researched smart beta strategies. Conclusion: Partial MythSource: Rayliant Global Advisors, Premia Partners as of May 31, 20179. A-shares investment requires quotas and other complex processesForeign investors used to invest in China A through either Qualified Foreign Institutional Investors (QFII) or Renminbi QFII. Each institution had to apply for its own quota to trade physical A-shares. But as Chinese regulators decided to open their capital markets to global investors, the Stock Connect program was introduced in November 2014. It is a more flexible scheme that does not require individual investor quotas. No applications or complex processes are required – a total of 1,485 A-shares listed in either Shanghai or Shenzhen is available for trading through Stock Connect on the Hong Kong Stock Exchange. Conclusion: Myth10. There isn’t enough research coverageThere are 3,608 A-shares listed in either Shanghai or Shenzhen with most of the names not recognizable by many foreign investors. Given the above concerns, it’s understandable that global investors wouldn’t be satisfied with a passive approach and prefer active management instead. But with so many stocks, it’s easy to get lost without investing material resources in research. This is where Premia can step in and help. 7 months ago we built two solutions to tap into different segments in China whilst capturing excess return. The Bedrock Economy strategy (2803 HK) focuses on stocks that are the backbone of the Chinese economy whilst the New Economy strategy (3173 HK) taps into the future growth story of China including consumption upgrades, technological advancement and aging population. Both strategies not only focus on those two different aspects of China A-shares, but then screen each universe to identify stocks that offer long-term excess return. Bedrock focuses on value, quality, low size and low volatility companies while New Economy prioritizes asset-light, quality and R&D focused firmsComparing the latest disclosure of the 234 index constituents for MSCI China A Inclusion, the following is an analysis of index correlation, stock and sector overlap with the underlying indexes of Bedrock Economy and New Economy. Bedrock Economy (2803 HK) has a much higher correlation and more stock overlap with MSCI China A Inclusion. If you’re aiming for excess return vs MSCI China A Inclusion but don’t want to deviate significantly from that benchmark, the 2803 HK would be the right choice. On the other hand, New Economy (3173 HK) offer a drastically different exposure, focusing more on Information Technology, Consumer Discretionary and Healthcare sectors. If you’re aiming to steer clear from large-cap SOEs and to prioritize China’s future rather than today’s economy, than 3173 HK may be the exposure for you. Conclusion: Partial MythSource: Bloomberg as of May 21, 2018Out of 10 common reasons for not investing in A-shares, we score 6 as complete myths, not based on current facts about A-shares. The other 4 are partial myths, where choices of data drive the outcome or where the facts are true, but the implication isn’t. In our view, gone are the days when A-shares as a market can be ignored. Investors need to allocate to A-shares in their portfolios, or risk decreasing their diversification and leaving opportunities for alpha on the table.Regards,David

May 28, 2018

Much has been made of the “copied in China” story over the last 1-2 decades. That perception is starting to shift, but ever so slowly with a lot more to be done. In this note, I take a look at the status of innovation in China, China’s ranking vs global peers, and how our ETF, 3173 HK, takes aim directly at China’s R&D and innovation companies (product page here and overview page here).

May 16, 2018

The first quarter of 2018 was a story of 2 halves. January was an aggressive move up in global markets, including A-shares across the board. It was essentially a continuation of 2017, with many of the same factor and sector performance dynamics. The correction from early February onward put a stop to that momentum trade, with A-shares seeing a wholesale rotation to different factor/sector results. Our New Economy and Bedrock ETFs underperformed in January but made up significant ground in February and March, so much so that New Economy (3173 HK) was one of the few A-shares strategies to deliver positive returns in Q1. Q1 overallChiNext led the market with a positive of 8.5% whilst FTSE A50 was down by 4.2%. A complete reversal of 2017. The A-shares market overall trended down with other global markets and the mega-cap rally ran out of steam. Sector wise, new economy sectors such as health care and information technology managed to have a positive return of 10.1% and 1.3%, respectively. All other sectors were negative, with telecom and consumer staples leading at -13.2% and -8.0%. All of this happened in February and March, with January looking like a continuation of 2017 – strong performance from financials and mega-caps. Momentum was king. But as the global correction got under way, it was the recent leaders that fell first. Investors began to take profit on their winners and refocused allocations to new economy and mid/small-cap stocks. The movement was in sync with policy agenda at the Two Sessions, held in March, emphasizing a shift in the economic growth model to focus on quality instead of quantity of growth. It was also in line with increased trade tariff rhetoric – new economy and smaller stocks are less exposed to global trade dynamics. Q1 performance by market cap Source: Bloomberg, as of 2 April 2018 Q1 performance by sector Source: Bloomberg, as of 2 April 2018 Factor resultsGoing forward, thanks to our friends at Rayliant, we will also include comments on factor patterns as well as traditional sector and macro drivers of returns. During the quarter, factor returns were subject to the same January vs February/March dynamic. January was led by Value and Low Risk, while Size suffered. This is in line with FTSE A50 outperformance, given mega-cap financials are not overly rich and score well on low volatility given their one-way performance in recent years. February and March witnessed completely different factor dynamics, with Value and Low Vol retreating into negative return territory by quarter-end. Instead, Quality and Growth ended the quarter positive and Size recovered nearly all of its January losses. Source: Rayliant Global Advisors, as of 10 April 2018 What will we see in the rest of 2018? January or February/March?Given the starkly different dynamics, many clients asked for our thoughts on which version of A-shares we expect to see going forward. Should we position for January or for February & March. Wihle there is no crystal ball to answer this question, we do have some compelling long-term data that points to February & March being the norm. Below are data points for Jan, Feb/Mar, 2017 and 10Y returns through the lens of market cap and sector allocations.Market cap – 10Y returns point to 2017 & January mega-cap outperformance being an outlier: we expect broader market cap exposures to continue to outperform. Source: Bloomberg, Premia Partners, as of 26 Jan 2018 Sectors – the last 10Y have been led by healthcare, consumer and technology stocks. It’s not lost on us that this is the exact composition of 3173 HK, though we have to admit we are a bit embarrased not to have built this chart earlier on. Source: Bloomberg, as of 2 April 2018 Relative Value in Large vs SmallThe biggest shift of the quarter was of course in the small vs large trade. We’ve been talking about this for a while, pointing out that both valuations and recent performance suggest that it might be time to underweight mega-caps. To recap, mid/small-caps retrenched from their 2015 peak to a PE sub 30x while mega and large-caps continued to trend up (left chart). The gap in large/small valuations is close to all-time tights – you can barely see the February/March correction in relative valuations (right chart). There is still more room for this relative value trade to run. PE Ratios Source: Bloomberg, Premia Partners, as of 2 April 2018 Here’s another way to look at the dispersion. Mid/small-caps are currently trading in the ~10th-20th percentile in valuations relative to their own history. In contrast, mega/large-caps are trading in the 50th-60th percentile vs the last 10 years. Over a shorter horizon, mega-caps in particular look rich in the 75th-85th percentile vs the last 3-5 years. Relative Historical Valuations Source: Bloomberg, Premia Partners, as of 2 April 2018 Premia A-shares ETFsIn terms of our ETFs, now that we have our first full quarter behind us, we can start to look back at their behavior. Here’s a quick summary of what you need to know:Summary statistics at quarter-end (in US$) – slow but steady growth in AUM and turnover. We saw multiple creates in both ETFs and an improvement in turnover from January to March. Source: Bloomberg, Premia Partners, as of 2 April 2018 Premium/Discount relative to other ETFs – despite launching less than 6 months ago, both 2803 HK and 3173 HK held their own in terms of premium/discount levels vs the more established ETFs. 2803 HK and 3173 HK averaged -0.28% and -0.05% in discount since inception. Don’t worry if you can’t spot the Premia ETFs immediately without looking at the legend. That’s the point – their premium/discounts are in line with the leading A-shares ETFs. Source: Bloomberg, Premia Partners, as of 2 April 2018 Index Return vs mainstream indices – The CSI Caixin Rayliant New Economic Engine Index (the index used by 3173 HK) outperformed all 3 of the major benchmarks (FTSE China A50 Index, CSI 300 Index, MSCI China A Inclusion Index) while the CSI Caixin Rayliant Bedrock Economy Index outperformed two of the three. Unsurprisingly, relative performance tracked the earlier-mentioned dynamics – underperformance during January and outperformance in February and March. Source: Bloomberg, as of 2 April 2018 3173 HK Performance Drivers – 2 things dominated returns: strong performance from its key sector exposures and its overall exposure to smaller stocks given its all-cap universe. Below is a Bloomberg attribution of returns for 3173 HK over 1Q18. Source: Bloomberg, as of 11 April 2018 The single biggest contributor was selection within the tech sector. Note that even though the overweight was high, it wasn’t the allocation to the sector that drove returns, but the selection of stocks, i.e. both our smart beta application and our all-cap approach (tech stocks not available in CSI 300). The financials underweight and healthcare overweight benefited performance, though selection from both sectors had a muted impact. Lastly, the consumer discretionary overweight and selection also contributed to returns.2803 HK Performance Drivers – the story is quite different for 2803. It underperformed slightly vs CSI 300 during the quarter, but the drivers were quite widespread. The average over/under-weight for each sector was ~2%, which resulted in minimal performance impact from allocation. Security selection in real estate, healthcare and consumer discretionary, however, hurt returns. A stronger impact from selection makes sense for 2803, given its active share of 48% vs CSI 300 and only 154 stock overlap. Source: Bloomberg, as of 11 April 2018 ********* Apologies for the long read. This was our first quarterly update and we’ll get better at them. Hopefully it was useful, and as always, should you have any questions, don’t hesitate to ask.

Apr 11, 2018

The topic of “trade war” seems to be dominating the market headlines lately with global equities weakening on poor sentiment. Should everyone simply sell their holdings and take a long vacation? It’s certainly important to be cautious and to consider downside risks. It might not be the worst decision for those who can take profit from the strong rally late last year and early this year, especially if there is no benchmark to worry about. However, adopting such a pessimistic approach and setting “risk avoidance at all cost” as a primary investment focus may result in many great opportunities missed. Indeed, even in today’s negative climate, we find some interesting movement in China A-shares that may help investors generate positive returns while overall markets are flat or down. On 22 Mar 2018, Trump signed an executive memorandum that would impose tariffs on up to USD 60 billion in Chinese imports. Global markets reacted with fear of a potential slowdown in the global economy with major indexes dropping the next day. The A-Shares market was no exception. Intriguingly, mega-to-large caps and mid-to-small caps reacted differently since then. Mega-to-large caps (FTSE A50 and CSI 300) fell immediately and continued down afterward whilst mid-to-small caps (CSI 500 and ChiNext) rebounded and even managed to record a positive return. It’s important to understand the difference in the universe of stocks before making decisions on the what and how of an A-shares allocation. Changes since trade war: mega-cap -5.5%; large-cap -3.3%; mid-to-small cap +0.3%; ChiNext +4.6% Source: Bloomberg as of 2 April 2018 Undoubtedly, most of these outperforming stocks come from segments that have less influence from overseas sales, such as semiconductor, IT services and health care. All 3 segments recorded a positive return during the down market. They are not only considered as defensive during the current trade war but also viewed as beneficiaries from the increasing tension in the bilateral trade between the US and China.Sector performance since trade war: Semiconductor +8.3%; IT Services +7.9%; Health Care +1.6% Source: Bloomberg as of 2 April 2018 The first outperforming segment that comes into our sight is Semiconductor. After the outbreak of the trade war, China may encourage the use of domestically developed semiconductor products rather than those imported from the US. One such product is the Graphics Processing Unit (GPU). Currently the world’s largest and leading GPU manufactures are mostly US companies, such as Nvidia and AMD. GPU not only plays an important role in gaming but also in the area of Artificial Intelligence (AI) and Cloud Computing. Since China advocates AI and Cloud Computing as future growth drivers, the demand for GPUs will remain high regardless of a trade war. At the company level, Changsha Jingjia Microelectronics (300474 CH), a domestic leading GPU manufacturer with strong research and development capabilities, may benefit from the switch. Zhejiang Jingsheng (300316 CH), a high-tech enterprise in semiconductor silicon material, PV silicon material and related equipment, would also gain from the potential change.Following the same logic, the IT Services segment had a great rally as well. One of the key sectors targeted for tariffs by the Trump administration is technology. It is highly likely that future sanctions may involve punishing Beijing over technology transfer policies. Separately, the State Council issued new guidelines last week that technology exports and Intellectual Property (IP) transfers that are part of acquisitions made by foreign firms involving patents, integrated circuit design and computer software copyright will be subject to national security checks. Going forward, domestic software companies such as Beijing VRV Software (300352 CH) and Xiamen Meiya Pico Info (300188 CH), focusing on information security software, may continue to take advantage of the government’s support to homegrown players.On the healthcare front, the National People’s Congress just passed a proposal to establish a National Health Commission, combining the functions of some former agencies. The main aim is to cut bureaucracy and implement a Healthy China strategy. China will move from a disease treatment approach to a preventative model. It is highly likely that the new agency will lead efforts in improving the medical services and insurance systems, while applying AI and Big Data technologies to promote precision medical treatment. Winning Health Technology (300253 CH) focuses on digitalizing medical information and applying AI and Big Data analysis in hospital and public health, while Autobio Diagnostics (603658 CH) specializes in R&D and production of clinical diagnostic products covering immunoassay, microbiology and biochemistry. Since most of their current and potential customers are domestic and would not be affected much by the trade war, it is not surprising that they managed to outperform after markets digested the initial news flow. Stocks from semiconductor, IT services and health care recorded decent gain in a down market Source: Bloomberg as of 2 April 2018 It’s not hard to notice a few similarities among these highlighted companies: (1) all of them are mid-to-small caps, (2) they have negligible overseas revenue, (3) most of them are listed in ChiNext, (4) they all belong to China’s new economy sectors. Because of the latter, they qualify for the Premia CSI Caixin New Economy ETF (3173 HK) which outperformed the broader market materially during this period. Source: Bloomberg as of 2 April 2018 We expect the development of a trade war to carry on in the next few months, causing ups and downs in global stock markets. It is hard to tell what path the negotiations and public rhetoric will take. From a macro point of view, we do see a silver lining in that China will further prioritize the development of domestic demand and will speed up innovation across many aspects of its economy. Aligning with its Made in China 2025 strategy and the national interest to become a tech superpower, it is time for Chinese companies to invest more in research and development. As investors, we see this as an opportunity to invest alongside government priorities and initiatives. As Warren Buffett once said “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.” We recommend embracing the change and using depressed overall market values to reallocate to your desired 3-5yr horizon positions, riding along the up-and-rising Chinese companies. Regards,David, Alex

Apr 06, 2018

We are in the middle of China’s “two sessions” and have seen a host of news and market adjustments over the last 5 weeks. 3 themes stand out – a commitment to 6.5% growth, a focus on national champion repatriation, and the beginning of a rotation away from mega-caps toward broader market cap exposure.

Mar 08, 2018

Last week on Thursday, we held a call moderated by Henny Sender of the FT with Prof Zhiwu Chen of HKU and David Lai from Premia Partners to discuss the future of China’s economy and markets. Below is a summary of the call, which covered the implications of quality vs quantity growth, SOE reform, the role of tech in China, risks on the horizon and what we expect going forward.

Feb 01, 2018

As we cross 3 months post listing, we take a look at the state of both China A-shares smart beta ETFs and ask our colleagues for recommendations in picking between the two.

Jan 29, 2018