China is one of the fastest growing economies in the world, with boundless long-term growth prospects and historically inefficient indices. With relatively little deep, fundamental research currently being conducted on Chinese companies, WCM believes this market is rife with opportunity.
Our process begins with analysis and qualification of portfolio candidates, identifying great businesses based on positioning (we avoid businesses fighting "headwinds" and require a long-lasting "tailwind"), competitive advantage (we insist on a durable, strengthening economic moat) and corporate culture (one that values great people and sustains the economic moat). Portfolio construction then provides a high level of risk control through thoughtful diversification while best capitalizing on the expected growth of these great businesses. In particular, when contemplating the inclusion of any specific company into the China Quality Growth portfolio, WCM will consider how the business fits the portfolio from traditional perspectives such as sector/industry diversification, but additionally from the perspectives of tailwinds (e.g., e-commerce, digitalization , import substitution of high-end technologies, consumption upgrade, education, health care, and the rapid shift to EV and alternative energy). The final portfolio is built with these inputs towards the goal of solid upside participation and extraordinary downside protection.
WCM utilizes independent sources for analysis of individual companies and trends – not Wall Street reports. Investment ideas are diverse in source, including scuttlebutt research through our network, independent research firms, industry publications, financial media, and news events.
WCM seeks quality growth businesses with superior growth prospects, high and/or rising returns on invested capital, and low or no debt. WCM also requires each company to maintain a durable competitive advantage – what management terms an economic moat. WCM strongly considers qualitative elements such as corporate culture and the strength, quality, and trustworthiness of management. WCM is sensitive to valuation and will avoid companies with limited or spotty histories. The WCM concentrates its efforts on large established businesses, with a primary emphasis in the large cap space. Unlike other China growth managers, WCM generally passes on businesses in leveraged, non-growth sectors such as utilities, basic chemicals, or timber. Instead, WCM focuses its attention on conventional growth sectors like technology, consumer discretionary, consumer staples, and health care. WCM also assesses further considerations specific to Chinese markets, such as the cultural alignment of founding families with shareholder interests, and the typical avoidance of state-owned enterprises ("SOEs").