Morningstar - Q2 2021 - 17

firms: China Mobile, China Telecom, and China
Unicom. Of the three, China Mobile was
the most widely held, and we spoke with several
managers who had to sell. The delistings
haven't discouraged the managers from pursuing
other attractive Chinese opportunities. Many
believe the country's emerging middle
class should provide fertile investment chances
for companies that are well positioned to
grow with it.
However, the recent controversies have forced
some managers to change the way they
evaluate risk. Some expect geopolitical tensions
to remain heightened for the foreseeable
future and are sifting through the investment
universe to determine which firms could become
targets of further regulation. One manager
is even considering the ramifications of a
complete U.S.-China split that would force global
companies to select sides. Currently, U.S.
Internet companies are mostly blocked from
operating within China by what's called the Great
Firewall, while Chinese firms face relatively
fewer hurdles to operating globally. While that
structure has been in place since the
mid-2000s, it looks increasingly untenable
to this manager and could serve as a guide for
future relations across all industries.

more when the brief sell-off made valuations
more attractive, even as they acknowledged the
companies' risks. Alibaba's push into payments
and consumer banking via Ant Group raised
enough concerns to delay the latter's planned IPO
and forced it to cooperate more with China's
existing financial system. Meanwhile, Tencent's
successful overseas investments in firms
like Tesla TSLA and Snap SNAP could draw more
scrutiny from the Chinese government should
it tighten its grip.

The managers we spoke with, however, remain
bullish on the two Chinese Internet behemoths
Alibaba and Tencent. They blame bad
headlines rather than deteriorating businesses
for volatility in 2020's fourth quarter, which
harmed Alibaba's share price more than Tencent's.
Indeed, many managers talked of buying

Tom Nations, CFP, is a manager research analyst at
Morningstar Research Services LLC.

China's Growing Influence in Major Benchmarks
MSCI Emerging Markets Index
MSCI All-Country World ex US Index

MSCI All-Country World Index

Allocation to China
50%
38.8 40
30

12.1

20

5.3 10
0
03/31/01

Asset managers must also contend with recently
heightened antitrust scrutiny on the largest
Chinese Internet firms. While they avoided threats
of banning from the United States, Alibaba
and Tencent are in the Chinese government's
crosshairs, as are several other emergent Chinese
e-commerce firms like JD.com JD, Meituan
MPNGY, and Pinduoduo PDD. This more uncertain
environment has led some managers to
set higher return thresholds for potential Chinese
investments and led others to focus on less
recognizable firms that avoid the increasingly
harsh spotlight.

While the recent challenges provided more
ammunition for China skeptics, bulls remained
optimistic. Finding opportunities, though,
might require more managers to extend the scope
of their analysis to include geopolitical and
macroeconomic tensions.

03/31/06

03/31/11

03/31/16

12/31/20

Source: Morningstar Direct.

International Morningstar Medalists With High Stakes in China
Name

Morningstar
Analyst Rating

Portfolio China % by
Date (Domicile)

China %
(Revenue)

Davis International DILYX

´

10/31/20

40.6

52.2

JHancock International Growth GOGIX

´

12/31/20

23.8

27.0

Vanguard International Growth VWILX

Œ

12/31/20

16.8

25.1

Hartford International Opportunities IHOIX

„

01/31/21

14.8

21.2

Goldman Sachs GQG Partners Intl Opps GSIMX

„

09/30/20

13.5

20.8

Invesco International Growth AIIYX

„

12/31/20

12.8

20.1

Vanguard FTSE All-World ex-US Index VFWSX

Œ

01/31/21

12.1

19.3

Invesco International Diversified OIDYX

´

12/31/20

10.6

18.5

Vanguard Total Intl Stock Index VTSNX

Œ

01/31/21

11.8

18.4

Fidelity Advisor Intl Capital Appreciation FCPIX

´

01/31/21

10.3

17.7

Source: Morningstar Direct.

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