Government bias & special treatment: investing in state capitalism

‘It’s a little bit different to what we’re used to in the West’, explains fund manager Jane Andrews.

Sometimes state-owned companies in emerging economies such as China are favoured; sometimes they’re given 'preferential tax treatment’, says the Citywire A-rated manager, who counts state-owned companies among her investments across Asia in the two funds she runs for Smith & Williamson.

Andrews is not alone in holding state owned companies: few funds invested in emerging markets are without major holdings in such firms, be it energy giants such as Brazil’s Bovespa or Russia’s Gazprom, or banks like China’s ‘Big Four’. Though governments wield various degrees of power over these companies, and shareholder interests may not be their top priority, they are seen as major cash cows and proxies for growing demand in the emerging markets.

‘I would look at them on merit – there are some good ones and there are some not so good ones – just like you would find investing in any company,’ says Andrews.

One such company, China Mobile, is one of the biggest holdings in Andrews’ Far Eastern Growth Trust, a Citywire Selection fund that she runs alongside the Oriental Growth fund.

China Mobile is among the telecommunication – or ‘Telco’ companies – that Andrews holds as defensive stocks to protect her portfolio in what she says will continue to be ‘volatile’ markets.

But state-owned enterprises come with more regulatory risk, Andrews concedes. ‘With some of the telco companies in China, they actually shuffle the management around every few years; the CEO of China Mobile will then go and become the CEO of China Unicom, and they’ll switch jobs.’

But of course being under state control brings its benefits: ‘They’re not about to let a big SOE go under,’ Andrews says.

The debate over the role of state capitalism, its advantages and problems, has grown amid a backlash against capitalism in the wake of the credit crunch.

Andrews is more concerned about banks, the biggest underweight sector in her Far Eastern Growth Trust. ‘They’re just not very transparent… you never know quite what’s tucked away in the woodwork,’ she says.