SMC China Fund

SMC China Opportunity Fund I Investment Strategy
SMC China Opportunity Fund I adopts a long bias absolute return strategy by investing in securities of high quality, growing, reasonably valued Chinese companies. Investment decisions are based on fundamental analyses of industries and companies within China with company valuations acting as the key input. The SMC Team also takes short positions based on an overall assessment of market conditions; however, the Fund maintains a long position bias with a 3 to 4 year investment horizon. The team also employs hedging techniques and conducts foreign exchange trading if such actions are considered to be in the best interest of the Fund.
Investments
In terms of long positions, the Fund allocates a majority of its net assets to investing in Chinese companies listed on the domestic stock exchanges of China and/or listed on other overseas stock exchanges in any other jurisdiction outside of China. The Fund’s current investable universe comprises of: • A and B shares of Chinese companies traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange • H-shares of China-registered companies listed on the Stock Exchange of Hong Kong Limited • Red-chip shares of China-registered companies listed on the Stock Exchange of Hong Kong Limited • Shares of Chinese companies listed in overseas markets, including Singapore and the United States • Shares of listed companies (in greater China and abroad) that derived a substantial earnings stream from doing business in China In terms of sector allocation, the Fund focuses on large-cap and mid-cap companies with stable growth and a strong asset base operating in sectors or industries that have natural or administrative entry barriers and significant competitive advantages. This focus has resulted in a concentration of investments in state owned enterprises and semi-state owned enterprises operating in retail and consumption, property, health care, information technology, financials, and commodities.
Stock Selection
The SMC Team carries out a structured stock selection process. First, we monitor the basic variables of a group of stocks such as their turnover, earnings growth, return on equity, and operating margin. This analytical screening filters out stocks with robust fundamentals. Second, we conduct valuations of these filtered companies using a range of qualitative measures and forward looking parameters. Examples of such qualitative measures include brand name recognition, competitive positioning, and management capability. Examples of evaluated forward looking parameters include macroeconomic cycles, sector outlooks, earnings growth, and price to earnings ratios.
SMC believes that an essential component to the stock valuation process is company visits. We are disciplined in visiting companies every quarter, and we ensure that our analysts meet and speak to the management of all the holdings in the Fund on a regular basis. During these visits, we pay particular attention to the more subtle aspects of the company, such as the reliability of their financial statements, the quality of disclosed information, and the knowledge and depth of experience of the management team. We believe that, in the long term, the presence of a local team with an in-depth cultural understanding of China which follows this methodology will give us an edge in obtaining superior information on stocks in the Chinese stock markets.
Finally, the analytical screening and the fundamental valuation process result in the generation of a database of actively targeted stocks and the construction of the Fund portfolio. Having generated an active database of target stocks, SMC continues to evaluate the macroeconomic environment and analyzes various technical factors to determine the ideal timing for portfolio transactions while considering the weighting of various portfolio assets. The team follows macro issues such as government policies, the political environment, and monetary policy, and technical factors such as moving averages and relative strength indices.
In aggregate, the stock selection process is a combination of a bottom-up approach, consisting of analytical screening and fundamental valuations, and a top-down approach, consisting of evaluations of the macroeconomic environment and various technical indicators. Combined, these approaches allow the team to construct the optimal portfolio.

Hedging and Shorting
Despite strong growth rates, the team recognizes the potential volatility of the Chinese market. Like many emerging economies, the stock market may be trading out-of-line with fundamental valuations for varying periods of time. Stock valuations can be distorted by liquidity, sentiment and other systemic factors. By using appropriate instruments to partially or wholly hedge the portfolio, we can maintain the absolute return achieved by stock selection. However, this hedging strategy is supplemental to the stock selection methodology and is not intended to generate significant alpha.
The hedging process is done systematically. On a weekly basis, the investment team will collate relevant top-down analyses and aggregate them for further analysis. These top-down variables belong to the following categories: • aggregate market earnings • economic leading indicators • market sentiment • aggregate market valuation (both relative and absolute) • technical factors and indicators This information is then discussed intensively among the investment team members. After considering the key variables and inputs, such as the level of absolute return already achieved and the views from the stock specialist, a consensus top-down view will be formed and the appropriate hedging percentage will be applied.
In summary, we operate a systematic approach to investing in China. We focus on our key strengths and maximize the returns generated from stock picking. For better managing the beta and volatility of the China market, we use limited hedging. Therefore, our Fund is a long biased equity product with a medium to long term investment horizon. As a committed stock picker, we do not expect to trade frequently. Finally, our robust quality control mechanisms ensure the effectiveness of all our stock selection and hedging activities.