Where to find unconstrained China exposure

Part of the early history of investment trusts was one of providing growth capital to developing markets. The names of many trusts today still remind investors of this, even if the mandate has long since changed (it is a shame, for example, the evocatively named Tramways of Montevideo trust no longer exists).

China and India are undoubtedly two of today’s developing markets. JP Morgan’s China and Indian trusts are two of the bigger trusts investing in those countries, but following a recent presentation it is clear both are managed with more than one eye on their respective benchmarks.

Having produced some uninspiring (relative) performance, we feel the two trusts could meet the needs of investors seeking active management more than they do presently. We don’t believe we are alone in this view, and it would be a shame if they were only seen as trusts in which to trade the discount.

While there are a number of smaller cap companies and trusts that invest in the two countries, one that we are particularly interested in is Origo Partners.

The firm was created in 2009 out of the merger of the management company and a fund it launched a few years previously. The new company is mainly a growth capital private equity company that seeks to take advantage of two areas where it sees rapid Chinese growth – namely demand for resources and environmental or clean technology solutions.

Founded by a Norwegian and a Swede, it is based in Beijing with a team that includes Chinese nationals. China is the company’s main investment focus.

RM Williams is an Australian company that grows produce to meet the increased Chinese demand for agricultural commodities. Management are excited about the potential of Unipower, which makes lithium ion batteries for electric vehicles, an area of rapid growth in China.

It has signed deals with regional governments in China to launch renminbi-denominated private equity funds, which the regional government and the company will invest and also seek outside capital.

These are also interesting from the perspective of earning the firm recurring management and performance fees, as well as giving it introductions into businesses in areas of China outside of the well covered coastal regions.

The focus on natural resources led Origo to have a number of investments in Mongolia, and it recently set up an office in Ulan Bator. The company has stakes in coal and copper operations in the country, with Origo’s stake in Gobi Coal & Energy being one of its biggest holdings.

It also founded a corporate finance joint venture in Mongolia, looking to take advisory roles in its future mining related initial public offerings.

We think the management are very switched on, have purchased a portfolio of very interesting companies and are aware of the need for them to demonstrate the key ability to sell as well as buy in the near future.