Geopolitical tensions with China are coming to a head in 2021, with uncertain implications for investors in U.S. equities. A recent executive order targets 31 companies suspected of helping the Chinese military. After repeatedly changing its stance on the matter, the New York Stock Exchange (NYSE) announced it will delist the American depository receipts of three major telecom firms, China Mobile, China Telecom Corp., and China Unicom, on Jan. 11, 2021. Investors have until Nov. 11, 2021, to divest.
The companies facing immediate removal from the NYSE likely aren’t a major part of most investors’ portfolios holding U.S. equities but may present issues on the margin. Indeed, actively managed funds with Morningstar Analyst Ratings held roughly $1.3 billion in securities facing an ownership ban as of their most recently disclosed portfolios.
Of the companies in question, funds owning China Mobile, the world’s largest wireless phone company, will feel the greatest impact. Fifteen actively managed funds in the U.S. that we cover held stakes totaling around only $700 million in the firm’s stock or ADR as of their most recently disclosed portfolios, with most of them holding allocations below 1%.
Portfolio managers’ interest in China Mobile is at a recent low, perhaps unsurprising given the level of geopolitical tension. In January 2018, 30 funds covered by Morningstar held positions in the company, which dropped by half by 2020.
Source: Morningstar Analysts
Perhaps of greater concern is the fate of other Chinese companies widely owned by U.S. investors. Reports suggest the U.S. is considering banning ownership of Alibaba (BABA) and Tencent (00700), two wildly popular technology companies that have raised significant capital from U.S.-based mutual funds in recent years. Indeed, 164 funds with Morningstar Analyst Ratings owned nearly $55 billion of Alibaba ordinary shares and ADRs as of their most recently disclosed portfolios, with 123 owning more than $30 billion in Tencent. The average position size in each company was around 3% of assets.
Over 100 funds held positions in both Alibaba and Tencent, with T. Rowe Price Blue Chip Growth’s (TRBCX) $6.6 billion investment in the two firms the largest investment in our rated universe in dollar terms. A wide array of funds from Vanguard, Capital Group, Invesco, JPMorgan, John Hancock, Fidelity, Harbor, Dodge & Cox, MFS, Artisan, Baron, and others were also recent owners.
While diversified foreign and emerging-markets funds owned the biggest stakes in these companies in dollar terms, some regionally oriented offerings had the most portfolio exposure to them. For instance, Matthews China (MCHFX) recently held 26.5% of its assets in Alibaba and Tencent.
As the uncertain situation develops, Morningstar analysts will report on how portfolio managers approach ownership of Chinese securities.
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