Geopolitical tensions with China are coming to a head in 2021, with uncertain implications for U.S. investors. 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 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 U.S.-based investors' portfolios 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 with Analyst Ratings held stakes totaling nearly $700 million in the firm’s stock or ADR as of their most recently disclosed portfolios. Of those owning ADRs, Lazard Emerging Markets’ LZEMX 1.9% stake was the largest by percentage of portfolio assets, while Harding Loevner International Equity HLMIX clocked in at about 1%. Ariel International AINIX had the highest exposure to the Hong Kong-listed equity, at 4.8% of assets, followed by Mondrian International Value Equity’s MPIEX 2.3%. Implications for funds owning the equity instead of ADRs are not immediately clear, though some volatility in the ordinary shares could ensue.
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. Notable sellers in recent years included a handful of Matthews funds, such as Matthews Pacific Tiger MAPTX and Matthews Asia Dividend MAPIX, as well as Causeway International Value CIVIX, Principal Diversified International PINPX, and Templeton Growth TEPLX.
- source: Morningstar Analysts
Other securities on the sanctions list were less popular with active managers. Only Thornburg Global Opportunities THOAX owned China Telecom. BlackRock Asian Dragon MAPCX, Hartford Schroders International Multi-Cap Value SIDNX, and Gabelli Utilities GABUX held China Unicom as of their most recently disclosed portfolios.
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 TCEHY, 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.
Analyst Jack Shannon contributed to this article.