Average three-month returns from Chinese equity funds and ARK funds have plunged, as China's economy faces domestic and international pressures while small technology companies record lower profits.
The Chinese equity funds recorded negative average returns of -15.5%, according to data from Morningstar Thailand.
The company said the plunge was attributed to both domestic and foreign factors pressuring the Chinese economy, especially the US Securities and Exchange Commission's plan to delist five Chinese stocks after it found these companies failed to comply with the requirements under the Holding Foreign Companies Accountable Act to submit annual financial statements, resulting in downgrades of other American depositary receipts (ADRs).
Most of the US-listed Chinese ADRs are tech stocks. Shares that may be subject to delisting include Yum China Holding, BeiGene, ACM Research Inc, Zai Lab Limited and HUTCHMED (China) Limited.
Morningstar Thailand said the total value of Thai investments in these Chinese funds stood at 83.87 billion baht last year, up 45% from 2020, contributing to 49.3% of total foreign investment in Chinese equity funds, which stood at 170 billion.
Fund managers in 2021 believed the Chinese economy would see a fast recovery this year thanks to the country's tight pandemic control measures, but this has not happened. The Chinese government's tightening of regulations in various industries will also affect the country's economic growth in the short term, said Morningstar.
Following news of the potential delisting, the US Fund China Region, an exchange-traded fund (ETF) and the master fund that invests in such ADRs, generated the lowest average three-month and one-year returns.
For the EAA Fund China Equity, EAA Fund China Equity - A Shares and the EAA Fund Greater China Equity, the three-month average returns were fairly similar, with all three groups having average returns in March of -6% to -8%.
Morningstar said as Thai investors bought Chinese stocks during a high-yield period, they are exposed to higher negative margins when the returns from these funds are negative.
Some securities analysts are optimistic about Chinese stocks in the second quarter because their current prices are relatively cheap.
Another group of funds posting negative returns includes equity technology funds under the ARK Investment Management group: ARK Fintech Innovation ETF (ARKF); ARK Genomic Revolution ETF (ARKG); ARK Innovation ETF (ARKK); and ARK Next Generation Internet ETF (ARKW).
All these ARK funds recorded negative one-year returns of worse than -20%.
ARK funds focus on investment in five sectors: artificial intelligence, blockchain, DNA sequencing, energy storage and robotics. The ARK team believes these sectors will make a big difference in the future economy.
These businesses experienced a temporary boom during the pandemic as people's lifestyles underwent mass digitalisation.
However, since the pandemic situation improved, investors are now returning to traditional sectors as the global economy recovers, leading these companies to generate lower returns.
Moreover, the ARK group has been facing challenges in management as it has "a high key-person risk" because of its management structure that concentrates authority in one person, said Morningstar.
In addition, Morningstar found the ARK group's team of analysts still lack in-depth experience in this industry compared with other competitors.
ARK Innovation ETF's latest portfolio contains 35 stocks, down from its high of 60 in April 2021, making ARKK one of the most highly concentrated funds. ARKK invests 15% of its portfolio in biotech, or more than five times the tally of the Russell Midcap Growth Index, the benchmark for global equity funds investing in high-growth small- and mid-cap stocks.
