Value Partners Group Case

HK1136
t
os
MENG RUJING
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VALUE PARTNERS GROUP LTD.
In August 2016, Jack Wong, an advisor at a Hong Kong financial service firm, received a huge
number of inquiries about Chinese equities from his clients. With the expected launch of the
Shenzhen and Hong Kong stock connect, there was a fad for mainland Chinese equities among
Hong Kong investors. However, most of them didn’t have much understanding of the Chinese
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equity market, so Wong wanted to get more information so his clients could better understand
the benefits and risks of such investments. Three of his clients already decided to allocate
additional Chinese equities and asked Wong to evaluate which were the best investment
instruments.
Mainland China Stock Market

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Mainland China had two stock exchanges, the Shanghai Stock Exchange (“SSE”) and Shenzhen
Stock Exchange (“SZSE”), launched in 1990 by the Shanghai municipal government and the
Chinese central government respectively. They were both supervised by the China Securities
Regulatory Commission (CSRC).
In terms of the types of shares listed on the two exchanges, China had a well-developed multi-
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tier system,1 composed of a Main Board, a Small and Median Enterprise (SME) Board, and
ChiNext. The Main Board was the top tier in the system, with the highest listing requirements
regarding registered capital, corporate earnings and minimal market capitalization for listed
companies. Most of the companies listed on the Main Board were mature companies with long
track records, large capitalization and stable earnings. The Main Board market was hosted on
both the SSE and SZSE. Within the Main Board, listed stocks were further categorized into “A-
shares” and “B-shares.” A-shares, the major component of the Main Board, were denominated
and traded in RMB on both exchanges, and were traded mainly by domestic institutions,
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organizations and individuals. Foreign investors were not allowed to invest in A-shares except
through either the Qualified Foreign Institutional Investor (QFII) or RMB Qualified Foreign
Institutional Investor (RQFII) programs, which were launched in 2002 and 2011 respectively.
Before that, foreign investors could only trade B-shares.
1 For details, see the Shanghai Stock Exchange website: http://english.sse.com.cn/ and the Shenzhen Stock Exchange website:
http://www.szse.cn/main/en/.
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Xiaozhou Yang prepared this case under the supervision of Dr. Rujing Meng for class discussion. This case is not intended to show
effective or ineffective handling of decision or business processes.
© 2017 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
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without the permission of The University of Hong Kong.
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Permissions@hbsp.harvard.edu or 617.783.7860
17/588C Value Partners Group Ltd.
B-shares were traded in foreign currencies: USD on the SSE and HKD on the SZSE. B-shares
were initiated in 1992 and limited to foreign investors until February 2001, when CSRC
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permitted domestic citizens to trade them. B-shares were supposed to accelerate the opening of
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the Chinese stock market. However, the development of B-shares lagged far behind the market
as a whole. At end of 2015, the total capitalization of A-shares and B-shares on the SSE was
Rmb 29.3946 billion and Rmb 124.8 billion respectively.2 The total capitalizations of A-shares
and B-shares in the SZSE were Rmb 7,528.0 billion and Rmb 96.3 billion respectively.3 B-
shares only accounted for 0.6% of the Main Board.
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In 1999, a second board for Chinese high-tech firms was proposed. However, with the bursting
of the dot-com bubble in 2000, high-tech stocks lost favor, and the plan was postponed. Instead
the SME Board was inaugurated in May 2004 as a second-tier market to meet the capital-raising
needs of smaller size, lower-quality, and higher-risk companies than were allowed in Main
Board. In October 2009, the third-tier market ChiNext was established for innovative growth
enterprises, with a role similar to NASDAQ in the US stock market. Both the SME Board and
ChiNext were hosted by the SZSE. In this multi-tier stock market, ChiNext listing requirements
were the least stringent, and listed companies were mostly in the uncertain growth stages of the
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business cycle. By contrast, companies on the Main Board were in a mature stage with larger
sizes, more stable earnings and lower risk. The SME board acted as a bridge between the two.
The different tiers were designed for companies in different stages and with different qualities
and risk profiles; this system maximized market efficiency and facilitated risk control.
On November 17, 2014, the SSE and Hong Kong Stock Exchange (“HKEx”) established mutual
links. This provided a cross-boundary channel through which investors in each market could
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trade equities listed in the other market, using local brokers and clearing services. Chinese
regulators made a critical decision to open the country’s equity markets to overseas investors
and improve market liquidity and efficiency. The Shanghai-Hong Kong stock connect would
be followed by a Shenzhen-Hong Kong stock connect to be launched in late 2016. With these
links, Hong-Kong and other overseas investors could access both mainland Chinese stock
exchanges and trade most stocks with large to medium capitalization through local Hong Kong
brokers.
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The SSE’s market capitalization grew quickly after 2006. After scaling back significantly
during the 2008 crisis, it picked up momentum quickly and almost tripled from 2008 to 2015.
The SZSE lagged behind from 2006 to 2008, but caught up gradually thereafter, especially with
the growth of the SME Board and ChiNext. In 2015, it reached a size comparable to the SSE.
[See Exhibit 1 for the evolution of market capitalization of both the SSE and SZSE from 1999
to 2015.]
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At the end of July 2016, the SSE and SZSE had 1081 and 1747 listed companies respectively,
and their market capitalizations had reached US$3870 billion and US$3157 billion, ranking
them fourth and seventh in size among international stock exchanges.4 Trading in the mainland
stock market was very active. In July 2016, among the 10 largest stock exchanges, the SZSE
had the second highest turnover, just behind the New York Stock Exchange, while the SSE
ranked at fourth behind the NASDAQ. [See Exhibit 2 for the market capitalization and turnover
of the world’s ten largest stock exchanges.] The high turnover could be attributed to the investor
structure of Chinese stock markets, where individual investors dominated. In 2015, individual
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2
Shanghai Stock Exchange (2016) Fact Book, http://english.sse.com.cn/indices/publications/factbook/c/4131355.pdf (accessed
8 October 2016).
3
Shenzhen Stock Exchange (2016) Fact Book, http://www.szse.cn/UpFiles/largepdf/20160323094430.pdf (accessed 8 October
2016).
4
World Federation of Exchanges (July 2016) Monthly Report, http://www.world-exchanges.org/home/index.php/statistics/
(accessed 8 October 2016).
investors contributed 87% of the trading value on the SSE, while institutional investors
contributed only 10%. At the end of 2015, the holdings of institutional investors accounted for
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only 14% of the total market capitalization of the SSE.5 Individual investors tended to trade
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more frequently with higher turnover, which added to market liquidity. However, individual
investors were also prone to be more irrational and had significant herd behavior, characteristics
widely cited as one reason for the high volatility of Chinese stock market.
The major benefit of investing in Chinese equities was the enjoyment of the high growth rate
of the Chinese economy. The 6.9% GDP growth rate in 2015 overshadowed other mature
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economies: 2.4% for the United States; 1.7% for Germany; and only 0.5% for Japan.6 Although
growth had slowed in recent years, China was still the key driver of global economic growth.
Moreover, as China was in the early stages of opening its capital markets, the correlation with
other developed markets was relatively low, offering overseas investors more potential for risk
diversification. [See Exhibit 3 for the correlation of returns on major international equity
indices from January 2006 to July 2016.] Especially in 2016, a series of events around the globe,
such as the European banking crisis, the Brexit referendum, the coming US presidential election
and the US Fed’s decision to hike interest rates, caused huge market volatility. The Chinese
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market performed like an isolated harbor and was less impacted by these events.
However, investing in Chinese equities also involved more risk than investing in developed-
market equities. There was a policy risk due to the uncertainty of Chinese regulatory decisions.
One example was the circuit-breaker mechanism introduced on January 4, 2016, which sparked
market panic and triggered massive sell-offs, before being suspended just three days later.
Another example was the stringent cross-border capital control the Chinese government
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implemented that year in response to the increasing pressure of RMB depreciation and capital
outflow. This prevented overseas investors from taking back their investments and certainly
dampened their enthusiasm. The market risk was also higher, as reflected in the higher volatility
of the Chinese equity market. With individuals accounting for the largest investor group, there
was a strong herd effect that could lead to collective irrationality. The CSI 300 Index was the
key equity index in the Chinese stock market, replicating the performance of 300 stocks traded
on the SSE and SZSE. From January 2006 to July 2016, its annualized volatility was 29.3%,
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while the volatility of the SP500 Index was only 18.1%. [See Exhibit 4 for the volatility of
returns in major international market indices from January 2006 to July 2016].
The Clients
Three of Jack Wong’s clients decided to add to their allocations of Chinese equities and asked
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his advice on the appropriate investment instruments.
James Chan, age 30, was an employee in a small local company. He had some experience in
trading mainland stocks himself, but the investment was not successful, so he had quit several
years before. He was optimistic about China’s economy, and positive on its progress in
integrating itself into international capital markets. He was bullish on the links with China,
which involved not only stocks listed in Mainland China, but also those listed in other Greater
China markets like Hong Kong or Taiwan, and operated in or derived their revenue largely from
the mainland market. Chan had no other outstanding investments at this time, and would
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establish a portfolio consisting solely of investments in Greater China equities.
5 Shanghai Stock Exchange (2016) Statistics Annual,

http://www.sse.com.cn/aboutus/publication/yearly/documents/c/tjnj_2016.pdf (accessed 8 October 2016).
6
The World Bank (215) “GDP Growth (annual %),”
http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=CN (accessed 8 October 2016).
Katie Lee, age 45, had founded her own company ten years before and was its CEO. She had
great success and had accumulated considerable wealth. She had already invested in several
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mutual funds that targeted Greater China equities, using the MSCI China Index as a portfolio
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benchmark. She worried about the political risks in developed markets, and liquidated some of
her investments in US and European equity markets. She planned to re-allocate these
investments to Greater China, as she believed the Chinese market was relatively isolated and
less correlated with international equity markets. She would establish an additional sub-
portfolio and expected to enhance the risk-return tradeoff of the whole Greater China portfolio.
Lee was also a true believer in value investing, and had already implemented this methodology
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in her portfolio. She also wanted this new sub-portfolio to follow a value strategy.
Thomas Tung, age 58, had just retired from his 35-year career by means of his company’s
voluntary retirement program. He had diverse investments, including real estate, equities and
life insurance. In equity investment, he was a bit conservative and only had passive investments
in iShare MSCI China ETF (exchange traded fund). The ETF tracked the MSCI China Index,
which represented the overall performance of equities in mainland China and Hong Kong. With
the lump-sum benefit offered by voluntary retirement, Tung wanted to add some active
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investments that used the MSCI China Index as a benchmark. He would keep the ETF he held
as his core portfolio, and expected the new investment to enhance the risk-adjusted return
without deviating significantly from the index. Tung was aware that many funds targeting
Greater China equities had allocations in Taiwan equities, but he was not familiar with the
Taiwan market and didn’t want too much exposure in it. He would make sure that the allocation
to the Taiwan market was less than 20%.
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Hong Kong Fund Industry
Wong suggested his clients invest into a fund that targeted the Chinese market rather than
maintaining a portfolio of individual stocks. There were several reasons for this. First, both Lee
and Tung had limited knowledge about industrial development in mainland China and its stock
market. Although Chan had some experience in trading mainland stocks, his unsuccessful
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record suggested that he didn’t have adequate investment skills.
Second, high volatility in the mainland stock market necessitated a highly diversified portfolio,
with many different stocks, in order to bring risk to an acceptable level. Maintaining such a
large portfolio required more time and energy that Wong’s clients could afford. Funds had more
resources and expertise for managing portfolio risk through fundamental analysis, portfolio
diversification and hedging.
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Last, although the Shanghai-Hong Kong stock connect provided a channel for Hong Kong
investors to trade shares in the mainland stock market, it didn’t cover all the stocks in the SSE,
and the SZSE was not accessible until the Shenzhen-Hong Kong stock connect was established.
This severely limited investment opportunities. In contrast, funds could be invested in all
mainland shares through the QFII or RQFII programs. Most funds targeting Greater China also
had allocations in Hong Kong and Taiwan, which enlarged the set of investment opportunities,
and offered more potential for return enhancement and risk diversification.
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Hong Kong had a well-developed fund-management industry. As an international financial hub,

the Hong Kong market accommodated funds that were registered in different countries,
positioned to different assets and markets, and denominated in different currencies. It had
significant growth, quadrupling its size from 2005 to 2015. As the end of 2015, Hong Kong
fund management had reached HK$17,393 billion.7 HK$ 6,823 billion in assets were managed
in Hong Kong, half of which were invested in the mainland and Hong Kong markets. [See
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Exhibit 5 for the development of fund management in the Hong Kong market from 2005 to
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2015].
The Hong Kong fund market encompassed mutual funds and unit trusts, real estate investment
trusts (REITs), exchange traded funds (ETFs), close-end funds, etc. Mutual funds and unit trusts
were the major category of funds in terms of both total number of funds and aggregate fund
size, and thus the major choice of retail investors. According to Securities & Futures
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Commission (SFC) regulations, all funds offered to the public in Hong Kong, especially to
retail investors, were required to obtain prior SFC authorization. There were 1904 authorized
unit trusts and mutual funds at end of March 2016, including 102 funds of funds and three hedge
funds. 8 As most of the hedge funds were only open to professional investors like financial
institutions or high net-worth individuals, they were exempted from SFC authorization and not
covered in the survey. Therefore, the actual number of hedge funds in the Hong Kong market
was much higher than the statistics. There were 1031 equity funds, accounting for 54% of the
total. Equity funds were also largest in terms of aggregated net asset value. At the end of 2015,
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the aggregated net asset value (NAV) of all authorized mutual funds and unit trusts reached
US$1264 billion, and equity funds made up 49% with a total NAV of US$616 billion. [See
Exhibit 6 and Exhibit 7 for the numbers and net asset value of authorized mutual funds and
unit trusts by fund type in the Hong Kong market.]9
At the end of August 2016, there were 82 funds invested in the Greater China equity market,
with a total fund size of US$36 billion.10 There were also an increasing number of Hong Kong
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renminbi funds invested in the mainland China equity market. On July 2015, the CSRC and
SFC launched the Mainland-Hong Kong Mutual Recognition of Funds (MRF) scheme, which
enabled eligible mainland and Hong Kong funds to be offered to the public in the other market
for the first time. In December 2015, the first batch of four mainland funds and three Hong
Kong funds were granted authorization. As of March 2016, there were 27 mainland funds and
six Hong Kong funds in the scheme.11 This further encouraged the flow of capital between the
mainland and Hong Kong, and was deemed another channel for the mainland equity market to
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attract overseas investment. As of March 2016, the total number of authorized RQFII/Stock
Connect unlisted funds and ETFs stood at 69 and 25 respectively, and the aggregate RQFII
quota utilized by these funds amounted to Rmb 19.9 billion.12 Investors could buy shares of
these funds with offshore CNH without converting them into USD or HKD.
Wong’s three clients agreed with his proposal that they invest in a fund to get exposure in
Greater China equities. However, they insisted on using local Hong Kong fund management
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companies, which they believed would have better resources and knowledge about the Chinese
market than overseas fund managers, and which also might be easier for them to communicate
with. They preferred funds with long track records (at least five years) and good reputations,
which increased confidence in future performance. They were not interested in passive
investment products like ETFs, which just tracked certain indices. Instead they preferred
7 Hong Kong SFC (July 2016) “Fund Management Activities Survey,”
http://www.sfc.hk/web/EN/files/ER/Reports/2015%20FMAS%20Report_English_Final_20160720.pdf (accessed 9 October
2016).
8 Hong Kong SFC (2016) “Number of Authorized Unit Trusts and Mutual Funds,”
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http://www.sfc.hk/web/EN/files/SOM/MarketStatistics/d02.pdf (accessed 9 October 2016).

9 Hong Kong SFC (2016) “Net Asset Value of Authorized Unit Trusts and Mutual Funds by Type (US$ million),”

10 Hong Kong Investment Funds Association (Aug 2016) “Retail Fund Monthly Performance,”
http://www.hkifa.org.hk/eng/Fund-Performance.aspx (accessed 9 October 2016).

11 Hong Kong SFC(2016) “Annual Report,” http://www.sfc.hk/web/annualreport2015-16/en/operational-review/investment-
products/index.html (accessed 9 October 2016).

12 Ibid.
actively managed or index-enhanced funds, as they believed skilled fund managers could add
value to portfolio performance. Lastly, they planned to invest in only one fund to begin with.
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They would consider adding more investments later if the performance of the first fund met
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their expectations.
Value Partners Group Ltd.

Among local Hong Kong fund management companies, Wong thought Value Partners Group
Limited was a good candidate. It was one of the largest and best-known asset management
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companies in Asia, and it already had several funds with long track records invested in Greater
China equities. It promoted value investing in its products, which was one of Lee’s
requirements.
Value Partners Group was one of Asia’s leading asset managers, with US$13.3 billion of assets
under management as of June 30, 2016. Present chairman and co-chief investment officer Dato’
Cheah Cheng Hye and businessman Yeh V-nee, a non-official member of the Executive Council
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of Hong Kong from 2009 to 2012, established the Group in 1993. In 2007, it became the first
asset management firm listed in Hong Kong, with stock code 806 HK. It was headquartered in
Hong Kong, with offices in other Asian financial hubs like Shanghai, Beijing, Chengdu, Taiwan
and Singapore. It offered diverse asset management portfolios to both institutional and
individual clients in Asia Pacific, Europe and the United States, including absolute return long-
biased funds, fixed income products, long-short hedge funds, exchange-traded funds and
quantitative funds. Its products had many achievements and were acknowledged within the
industry. In 2015, it won the “Best Fund Provider – Greater China Equity,” awarded by Asian
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Private Banker, and in 2016, it won the “Best Equity Group (Hong Kong),” awarded by
Thomson Reuters Lipper Fund. These prizes reflected Value Partners’ excellent investment
skills and deep understanding of the Greater China equity market.13
As its name indicated, Value Partners Group promoted the value-investing philosophy, which
was to buy stocks with prices below the fair value implied by the business fundamentals, on the
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conviction that such mispricing would be corrected and the market price would appreciate in
the long term. This approach to investing was founded on the belief that stocks tended to be
mispriced by the market in the short term, as investors reacted irrationally and emotionally to
news or events, but that the market was efficient in the long run and prices would finally
converge with fair value.14
Value investing required investors to understand the developmental stage and competitive
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environment of the markets that a company operated in. It also required knowledge about the
company itself, its corporate value, business plan and competitive advantages. At the same time,
monitoring market reaction was essential to find opportunities when market price deviated from
the fair price implied by company fundamentals. Usually, value investors use different financial
ratios, such as price-to-earnings, price-to-book-value. price-to-sales and price-to-cash-flow
ratios, as well as dividend yield, to compare the attractiveness of different companies. Contrary
to momentum strategy, which followed market trends and bought stocks favored by other
investors, value investing tended to take positions contrary to “collective intelligence.” Value
investors usually bought stocks that were depressed because investors over-reacted to bad news,
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and sold stocks on which the market was over-optimistic.
13 For details, see the Value Partners Group website: https://www.valuepartners-group.com/en/.

14 Value Partners Group (n.d.) “Our Investment Philosophy - Value Investing,” https://www.valuepartners-group.com/en/about-
us/investment-philosophy/value-investing/ (accessed 9 October 2016).
As the series of MSCI China equity indices showed, value strategy outperformed both market
benchmarks and growth strategy in the long run. [See Exhibit 8 for the total return performance
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of the MSCI China Index, MSCI China Value Index and MSCI China Growth Index from
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December 1996 to July 2016]. According to the MSCI China Value Index, HK$1 invested at
end of 1996 would have appreciated to HK$5.52 by the end of July 2016, while HK$1 invested
in the universe of Greater China equities represented by the MSCI China Index only grew to
HK$1.45 during the same period. Growth strategy performed even worse: With a HK$1 initial
investment, there would be only HK$0.53 left.
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At the end of July 2016, Value Partners offered nine retail funds, following three investment
strategies, to Hong Kong investors. There were seven funds following an absolute return long-
biased strategy: High-Dividend Stocks Fund, Classic Fund, China Greenchip Fund, China
Convergence Fund, Chinese Mainland Focus Fund, China A-Share Select Fund and Taiwan
Fund. There were a Multi-Asset Fund following a multi-asset strategy and a China High Yield
Income Fund following a fixed-income strategy. [See Exhibit 9 for a complete list of the nine
retail funds.]15 Among all the nine retail funds, Wong found five candidates that targeted Greater
China equities.
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Value Partners Classic Fund primarily invested in stock markets in the Asia-Pacific region, with
a Greater China focus. 16 Its “A” units were launched on April 1, 1993, with USD as the base
currency. However, subscriptions to both “A” and “B” units were closed and only “C” units
were still available for purchase. Since inception, its annualized return and volatility were
+14.8% and 22.1% respectively. As of July 29, 2016, the total fund size reached US$1,534.3
million. [See Exhibit 10 for more facts about the fund.] “A” units, “B” units and “C” units were
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subject to different management fees: 0.75% per annum for “A” units and 1.25% per annum
for “B” and “C” units. Moreover, both “A” and “B” units were denominated only in USD, while
“C” units offered more choices. Investors could invest in classes denominated in other
currencies, like AUD, CAD, HKD, CNY and NZD, and could also select classes that either did
or did not hedge currency risk.
Value Partners China Greenchip Fund invested mainly in companies established in Greater
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China, or those that derived most of their revenue from business in the form of direct investment
in, or trade with, Greater China. This included companies incorporated and/or listed outside
Greater China. 17 Class N of China Greenchip Fund was first launched on April 8, 2002, but was
already closed as of July 2016, while Class A, launched on March 27, 2007, was still available.
The annualized return and volatility of Class A after launch were +3.9% and 24.9% respectively.
As of July 29, 2016, the total fund size reached US$473.2 million. [See Exhibit 11 for more
facts about the fund.]
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China Convergence Fund was a sub-fund of Value Partners Intelligent Funds. It primarily
invested in A and B shares listed on the SSE and SZSE, as well as in H shares listed on the
HKEx. The fund invested in A shares through the RQFII investment quota and the Shanghai-
Hong Kong Stock Connect. 18 It was launched on July 14, 2000, and at the time aimed to invest
primarily in mainland B shares. The investment mandate was extended in July 2001 to include
H shares, and in March 2005 to include mainland A shares. The annualized return and volatility
since launch were +17.3% and 26.2% respectively. As of July 29, 2016, the total fund size
reached US$432.4 million. [See Exhibit 12 for more facts about the fund.]
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15 Value Partners Group (August 2016) “Fund Menu,” https://www.valuepartners-group.com/wp-content/uploads/2016/03/Fund-

Menu_August_2016_nonPIEng_Final_Aug31updated.pdf (accessed 9 October 2016).
16 Ibid.
17 Ibid.
18 Ibid.
Chinese Mainland Focus Fund was another sub-fund of Value Partners Intelligent Funds. The
fund’s investments were related primarily to mainland China and instruments whose value
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would be boosted by a CNY appreciation. 19 The annualized return and volatility since it was
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launched on November 27, 2003 were +10.8% and 23.0% respectively. As of Jul 29, 2016, the
total fund size reached US$117.4 million. [See Exhibit 13 for more facts about the fund.]
Value Partners China A-Share Select Fund invested primarily in CNY-denominated A shares
listed on the SSE and SZSE, utilizing the RQFII quota. 20 It was first launched on October 16,
2014, and had a very short track record. Its return since launch was +24.2%, and total fund size
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reached US$112.6 million at the end of July 2016. [See Exhibit 14 for more facts about the
fund]
Among the five candidates, Wong excluded China A-Share Select Fund as it had a track record
of less than two years and didn’t meet client requirements. The next step was to evaluate the
historical performance of each fund and select the most appropriate one for each of his three
clients.
yoPerformance Evaluation
Wong realized both return and risk should be considered in performance evaluation. Before
analyzing performance evaluation, he had to decide how to measure risk. Return volatility, the
standard deviation of historical return, was a widely accepted method. However, Wong
remembered the method had some limitations, assuming that fund returns followed normal
distribution, which might not be the case in the reality. Despite this limitation, he admitted
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return volatility was still one of the best risk measures. He would use it as one of several
alternative risk measures, but before doing so would check to what extent the returns of each
fund deviated from the assumption.
When it came to performance evaluation, Wong thought it appropriate to use the MSCI China
Index as the benchmark, since his clients were targeting Greater China equities, and the four
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funds under consideration were also Greater China-oriented and used the MSCI China Index as
a benchmark in their marketing materials. As the three clients had distinct asset allocations and
different expectations of the new investment, Wong believed that he should use different
performance measures tailored to each client’s needs.
Wong also had to do further analysis in response to Lee’s and Tung’s additional concerns. As
Lee required the new investment to follow the value-investing approach, Wong would conduct
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a style analysis on the funds to see how much they were tilted to a value or growth strategy.
The MSCI China Value Index and MSCI China Growth Index could be proxies for the
performances of the value and growth strategies. Wong also collected several value metrics for
the market index and two style indices for purposes of comparison [see Exhibit 15]. Tung
demanded that the investment should not allocate too much to Taiwan equities. Wong planned
to check the holdings on the one hand, and on the other, if there was no holding data available,
to calculate how much of the fund’s performance could be attributed to the performance of each
market within Greater China.
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19 Ibid.
20 Ibid.
EXHIBIT 1: DEVELOPMENT OF CHINA STOCK MARKET DURING 1999-2015
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Market Capitalization (Trillion Rmb 60.0
50.0
40.0
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30.0
20.0
10.0
0.0
199 200 200 200 200 200 200 200 200 200 200 201 201 201 201 201 201
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9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5
Shenzhen 1.2 2.1 1.6 1.3 1.3 1.1 0.9 1.8 5.7 2.4 5.9 8.6 6.6 7.2 8.8 12.9 23.6
Shanghai 1.5 2.7 2.8 2.5 3.0 2.6 2.3 7.2 27.0 9.7 18.5 17.9 14.8 15.9 15.1 24.4 29.5
Source: Shenzhen Stock Exchange (2016) Fact Book,

http://www.szse.cn/main/en/MarketStatistics/FactBook/ (accessed 8 October 2016);
Shanghai Stock Exchange (2016) Fact Book,
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http://www.sse.com.cn/market/stockdata/overview/yearly/ (accessed 8 October 2016).
EXHIBIT 2: TEN LARGEST STOCK EXCHANGES IN THE WORLD PER MARKET

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CAPITALIZATION AT END OF JULY 2016
Market Number of Listed

Stock Exchange Turnover3
Capitalisation1 Companies2
New York Stock Exchange 18,831,799 2,403 1,269,501
Nasdaq - US 7,513,122 2,843 768,762
Japan Exchange Group 4,985,507 3,509 501,252
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Shanghai Stock Exchange 3,870,383 1,081 713,031

London Stock Exchange Group 3,589,416 2,668 192,529
Euronext 3,421,034 1,067 129,742
Shenzhen Stock Exchange 3,156,684 1,747 1,196,083
Hong Kong Exchanges and Clearing 3,101,170 1,873 98,956
TMX Group 1,935,991 3,553 83,842
Deutsche Boerse 1,653,810 615 95,534
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1
In million USD as of end of July 2016.
2
As of end of July 2016.
3
Total turnover in million USD during July 2016.
Source: World Federation of Exchanges (July 2016) Monthly Report,
http://www.world-exchanges.org/home/index.php/statistics/ (accessed 8 October 2016).
EXHIBIT 3: RETURN CORRELATION OF MAJOR INTERNATIONAL EQUITY INDICES

FROM JANUARY 2006 TO JULY 2016
t
os
CSI 300 STOXX 50 FTSE 100 Nikkei 225 KOSPI TWSE HSI
S&P 500 0.12 0.81 0.84 0.57 0.61 0.54 0.62
CSI 300 --- 0.15 0.14 0.21 0.26 0.27 0.38
STOXX 50 --- --- 0.89 0.61 0.64 0.57 0.65
FTSE 100 --- --- --- 0.62 0.67 0.59 0.69
rP
Nikkei 225 --- --- --- --- 0.63 0.58 0.65
KOSPI --- --- --- --- --- 0.76 0.75
TWSE --- --- --- --- --- --- 0.68
Source: Bloomberg, calculated based on weekly return denominated in HKD.
yo
EXHIBIT 4: RETURN VOLATILITY OF MAJOR INTERNATIONAL EQUITY INDICES FROM
JANUARY 2006 TO JULY 2016
op
Equity index S&P 500 CSI 300 STOXX 50 FTSE 100 Nikkei 225 KOSPI TWSE HSI
Annualized
18.1% 29.3% 26.3% 22.6% 19.7% 28.6% 21.4% 22.8%
volatility
Source: Bloomberg, calculated based on weekly return denominated in HKD.

tC
No
Do
10
EXHIBIT 5: TOTAL SIZE OF FUND MANAGEMENT BUSINESS IN HONG KONG DURING

2005-2015
t
os
Trillion HK$
20
15
rP
10
0
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
4.5 6.2 9.6
yo 5.9 8.5 10.1
Source: Hong Kong SFC (July 2015) “Fund Management Activities Survey”,
9.0
http://www.sfc.hk/web/EN/files/ER/Reports/2015%20FMAS%20Report_English_Final_2016072
0.pdf (accessed 9 October 2016).
12.6 16.0 17.7 17.4
op
tC
No
Do
11
EXHIBIT 6: NUMBER OF AUTHORIZED MUTUAL FUNDS AND UNIT TRUSTS BY TYPE

IN HONG KONG AT END OF 2015
t
os
Guaranteed, 3, 0% Hedge, 3,
0% Other Specialised,
Index, 161, 9% 14, 1%
Fund of Funds, 102,
5%
Money Market, 46,
3%
rP
Bond, 404, 21%
Diversified, 140, 7%
Equity, 1031, 54%
yo
Source: Hong Kong SFC (2016) “Number of Authorized Unit Trusts and Mutual Funds”,
op
EXHIBIT 7: NET ASSET VALUE OF AUTHORIZED MUTUAL FUNDS AND UNIT TRUSTS
BY TYPE IN HONG KONG AT END OF 2015
tC
Index, 78,249 , 6% Hedge, 85 , 0% Guaranteed, 72 , 0%

Fund of Funds, 15,829 , 1% Other Specialised, 1,531 ,…
Money Market, 20,267 ,…
Diversified, 116,908 , 9%
No
Bond, 414,296 , 33%
Equity, 616,477 , 49%

Do
currency: million US$
Source: Hong Kong SFC (2016) “Net Asset Value of Authorized Unit Trusts and Mutual Funds
by Type (US$ million)”, http://www.sfc.hk/web/EN/files/SOM/MarketStatistics/d03.pdf (accessed
9 October 2016).
12
EXHIBIT 8: PERFORMANCE OF STYLE INDICES IN CHINA STOCK MARKET FROM

DECEMBER 1996 TO JULY 2016
t
os
9.00
8.00
7.00
Total Return Index
6.00
rP
5.00
4.00
3.00
2.00
1.00
0.00
yo
Dec/96
Dec/97
Dec/98
Dec/99
Dec/00
Dec/01
Dec/02
Dec/03
Dec/04
Dec/05
Dec/06
Dec/07
Dec/08
Dec/09
Dec/10
Dec/11
Dec/12
Dec/13
Dec/14
Dec/15
MSCI China MSCI China Value MSCI China Growth
Source: Bloomberg, calculated based on the total return of each index denominated in HKD.
op
EXHIBIT 9: RETAIL FUNDS OFFERED BY VALUE PARTNERS GROUP TO HONG KONG

tC
INVESTORS AS OF JULY 2016
Item Fund Name Fund Size1 Base Currency Launch Date

1 Classic Fund 1543.3 USD April 1 1993
2 China Greenchip Fund 473.2 HKD April 8 2002
3 China Convergence Fund 432.4 USD July 14 2000
No
4 Chinese Mainland Focus Fund 117.4 USD November 27 2003

5 China A-Share Select Fund 112.6 CNY October 16 2014
6 Taiwan Fund 68.3 USD March 3 2008
7 High-Dividend Stocks Fund 3583.7 USD September 2 2002
8 Multi-Asset Funds 50.79 USD October 13 2015
Greater China High Yield
9 1890 USD March 27 2012
Income Fund
Do
1
In million USD
Source: Value Partners Group (August 2016) “Fund Menu”, https://www.valuepartners-

group.com/wp-content/uploads/2016/03/Fund-
13
EXHIBIT 10: FUND FACTS FOR VALUE PARTNERS CLASSIC FUND
t
Top 10 securities holdings as at the end of July 2016:
os
Stock Name Industry Weight
SIIC Environment Utilities 6.3
Largan Precision Technology, hardware & equipment 5.4
Weibo Software & services 5.3
Logan Property Real estate 5.0
Taiwan Semiconductor Semiconductors & semiconductor
4.3
rP
Manufacturing equipment
PetroChina Energy 3.8
Gree Electric Appliances Consumer durables & apparel 3.5
China Mobile Telecom services 3.1
Minth Group Automobiles & components 3.0
Shenzhou International Consumer durables & apparel 2.6
Price/earnings ratio
11.5
yo
Portfolio characteristics as at the end of July 2016:
Price/book ratio
2.3

Dividend yield
3.0%
op
tC
No
Do
14
EXHIBIT 11: FUND FACTS FOR VALUE PARTNERS CHINA GREENCHIP FUND
t
os
Tecent Holdings Software & services 6.7
Taiwan Semiconductor Semiconductors & semiconductor
4.6
Manufacturing equipment
SIIC Environment Utilities 4.2
China State Construction
rP
Capital goods 4.1
International
Largan Precision Technology, hardware & equipment 3.9
China Mobile Telecom Services 3.6
Techtronic Industries Consumer durables & apparel 3.2
HKT Trust & HKT Telecom services 3.0
13.7 yo
Price/book ratio
2.8

Dividend yield
3.2%
op
tC
No
Do
15
EXHIBIT 12: FUND FACTS FOR VALUE PARTNERS CHINA CONVERGENCE FUND
t
os
Sunny Optical Technology Technology, hardware & equipment 6.6
Tencent Holdings Software & services 5.9
Sundart Holdings Consumer durables & apparel 4.9
Fuyao Glass Industry Automobiles & components 4.7
Zhuzhou CSR Times Electric Capital goods 4.3
rP
China Oversears Land &
Real estate 3.4
Investment
China Resources Land Real estate 3.2
Pharmaceuticals, biotechnology & life
China Traditional Chinese Medicine 3.1
sciences
12.9 yo
Price/book ratio
2.7

Dividend yield
2.3%
op
tC
No
Do
16
EXHIBIT 13: FUND FACTS FOR VALUE PARTNERS CHINESE MAINLAND FOCUS FUND
t
os
Tencent Holdings Software & services 5.8
Midea Group Consumer durables & apparel 5.2
Harbin Electric Capital goods 4.8
China Eastern Airlines Transportation 4.0
rP
Shanghai Mechanical and Electrical
Capital goods 3.6
Industry
Wynn Macau Consumer services 3.2
Inner Mongolia Yili Industrial Food, beverage & tobacco 3.1
Qingdao Haier Consumer durables & apparel 3.1
14.1
yo
Price/book ratio
2.7

Dividend yield
2.2%
op
EXHIBIT 14: FUND FACTS FOR VALUE PARTNERS CHINA A-SHARE SELECT FUND
tC

Kweichow Moutai Food, beverage & tobacco 7.8
Hangzhou Hikvision Digital
Technology, hardware & equipment 5.9
Technology
Vatti Consumer durables & apparel 5.8
GoerTek Technology, hardware & equipment 5.3
No
Ping An Insurance Insurance 5.0

Price/earnings ratio Price/book ratio Dividend yield
17.2 3.6 2.0%

Do
17
EXHIBIT 15. VALUE METRICS OF MARKET INDEX AND STYLE INDICES
t
Price/earnings Price/book Dividend
os
ratio ratio yield
MSCI China Index 12.66 1.46 2.38%
MSCI China Value Index 8.95 0.94 3.82%
MSCI China Growth Index 24.01 3.26 0.97%
rP
Source: Bloomberg, as of 29 July 2016.
yo
op
tC
No
Do
18

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HK1136

Mainland China Stock Market

his advice on the appropriate investment instruments.

establish a portfolio consisting solely of investments in Greater China equities.

5 Shanghai Stock Exchange (2016) Statistics Annual,

record suggested that he didn’t have adequate investment skills.

Hong Kong had a well-developed fund-management industry. As an international financial hub,

http://www.sfc.hk/web/EN/files/SOM/MarketStatistics/d02.pdf (accessed 9 October 2016).

http://www.sfc.hk/web/EN/files/SOM/MarketStatistics/d03.pdf (accessed 9 October 2016).

http://www.hkifa.org.hk/eng/Fund-Performance.aspx (accessed 9 October 2016).

products/index.html (accessed 9 October 2016).

Value Partners Group Ltd.

and sold stocks on which the market was over-optimistic.

13 For details, see the Value Partners Group website: https://www.valuepartners-group.com/en/.

15 Value Partners Group (August 2016) “Fund Menu,” https://www.valuepartners-group.com/wp-content/uploads/2016/03/Fund-

EXHIBIT 1: DEVELOPMENT OF CHINA STOCK MARKET DURING 1999-2015

Source: Shenzhen Stock Exchange (2016) Fact Book,

EXHIBIT 2: TEN LARGEST STOCK EXCHANGES IN THE WORLD PER MARKET

CAPITALIZATION AT END OF JULY 2016

Market Number of Listed

Shanghai Stock Exchange 3,870,383 1,081 713,031

EXHIBIT 3: RETURN CORRELATION OF MAJOR INTERNATIONAL EQUITY INDICES

Source: Bloomberg, calculated based on weekly return denominated in HKD.

Source: Bloomberg, calculated based on weekly return denominated in HKD.

EXHIBIT 5: TOTAL SIZE OF FUND MANAGEMENT BUSINESS IN HONG KONG DURING

yo 5.9 8.5 10.1

EXHIBIT 6: NUMBER OF AUTHORIZED MUTUAL FUNDS AND UNIT TRUSTS BY TYPE

Equity, 1031, 54%

Index, 78,249 , 6% Hedge, 85 , 0% Guaranteed, 72 , 0%

Money Market, 20,267 ,…

Bond, 414,296 , 33%

Equity, 616,477 , 49%

currency: million US$

EXHIBIT 8: PERFORMANCE OF STYLE INDICES IN CHINA STOCK MARKET FROM

EXHIBIT 9: RETAIL FUNDS OFFERED BY VALUE PARTNERS GROUP TO HONG KONG

INVESTORS AS OF JULY 2016

Item Fund Name Fund Size1 Base Currency Launch Date

4 Chinese Mainland Focus Fund 117.4 USD November 27 2003

Source: Value Partners Group (August 2016) “Fund Menu”, https://www.valuepartners-

EXHIBIT 10: FUND FACTS FOR VALUE PARTNERS CLASSIC FUND

Source: Value Partners Group (August 2016) “Fund Menu”, https://www.valuepartners-

Source: Value Partners Group (August 2016) “Fund Menu”, https://www.valuepartners-

Source: Value Partners Group (August 2016) “Fund Menu”, https://www.valuepartners-

Source: Value Partners Group (August 2016) “Fund Menu”, https://www.valuepartners-

Top 5 securities holdings as at the end of July 2016:

Ping An Insurance Insurance 5.0

Portfolio characteristics as at the end of July 2016:

Source: Value Partners Group (August 2016) “Fund Menu”, https://www.valuepartners-

Menu_August_2016_nonPIEng_Final_Aug31updated.pdf (accessed 9 October 2016).

EXHIBIT 15. VALUE METRICS OF MARKET INDEX AND STYLE INDICES

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