ASHR Might Finally Be Staging A Turnaround

| About: Deutsche X-trackers (ASHR)

Summary

The CSI 300 A-shares have had a terrible year, but still represent 309 of the largest companies in China.

With a SEC yield close to 3.00%, what does this non-diversified portfolio represent?

We answer these questions and provide our recommendation.

Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (NYSEARCA:ASHR) is a cap-weighted fund that, according to the sponsor Deutsche Bank:

...seeks investment results that correspond generally to the performance, before fees and expenses, of the CSI 300 Index. The CSI 300 Index is designed to reflect the price fluctuation and performance of the China A-share market and is composed of the 300 largest and most liquid stocks in the China A-share market. ASHR is sub-advised by Harvest Global Investments Limited.

The companies listed in the CSI, (China Securities Index), 300 Index would be ones that trade on the Shanghai and Shenzhen exchange. It should be noted that approximately 18.33% of the companies in the ETF are listed in the US as ADRs, according to the sponsor. We analyzed the ETF, its structure, sectors, industry and its top holdings and reviewed the underlying index. We also reviewed and determined if the A shares will be added to the MSCI within the next quarter and the overall ramifications to the ETF should this occur.

The ETF, with an inception date of November 06, 2013 has 309 holdings plus cash and net assets of 428M. A sister fund, CSI 300 China A-shares Hedged ETF ASHX (which we will discuss shortly), which launched on October 20, 2015 has 2.2M in net assets, as of April 14, 2016.

In terms of capitalization most sources state that ASHR is a large cap fund. Fidelity gives a more thorough breakdown as Large at 45.53%, Mid: 39.57%, Small: 14.88% and Other: -.01%. It should be noted that these weightings are not fixed and tend to move on a day to day basis with their underlying market prices. All sources concur that the fund holdings would be classified as a blended style.

The country exposure is not quite 100% China, but for all intends and purposes it is. It is classified as 99.56% China, Hong Kong: 0.40%, Taiwan: 0.04%. In terms of the currency it is 99.56% China Renminbi and .44% Hong Kong dollar, which is tied to the US dollar. Although the fund trades in US dollars there is currency exposure, especially with the weakening RMB. As mentioned earlier, the sponsor and fund manager late last year issued a hedged version of the fund. A sister fund, CSI 300 China A-shares Hedged ETF, ASHX, is a recent addition for investors seeking protection and is actually quite a prudent investment. Investors will generally receive less in returns but also have protection against RMB movements. This new ETF is actually a tracker ETF with a short RMB position and a long dollar position. At this time, it is showing a profit on its hedged currency position. Unfortunately, ASHX has yet to attract significant assets. It will be interesting to see whether it can attract further assets if the RMB continues to weaken.

In order to review the overall ETF it is important to example the sectors within the fund. The sector construction of the ETF is quite informative.

ASHR Sector exposure as of April 20, 2016

Sector Weight
Financials 40.84%
Industrials 15.60%
Consumer Discretionary 10.65%
Information Technology 7.45%
Materials 6.26%
Consumer Staples 5.72%
Health Care 5.44%
Utilities 4.45%
Energy 2.87%
Telecommunication Services 0.70%
Click to enlarge

With almost 41% in financials, there is obvious exposure to a changing economy but also an overall benefit derived from reform and further benefit to restructuring of money losing and non-performing assets. It is also good to see the growing sector of consumer discretionary accounting for almost 11.00% of the fund. To analyze the sectors in depth it is important to review the overall industry exposure within each sector.

A SHR Industry Exposure as of April 18, 2016

While it is stated by the sponsor and the fund manager that the index and the ETF are non-diversified, it a fairly diverse fund overall. Unfortunately, the holdings are not effectively diversified as they are limited in sectors and concentration risks remains prevalent. There is still a large percentage (but not majority) in banks and financial service firms, with a true mixture amongst the remaining holdings.

In order to properly ascertain the overall exposure of the top holdings we reviewed the top holdings, as usual. We reviewed and analyzed the top 15 holdings, their weighting within the ETF, their ratings, (Moody's and S&P), performance and dividends.

ASHR top 15 holdings

Name Symbol

Ratings

(Moody's/

S&P)

Perf 12-

month/

YTD

Yearly Dividend Weight
Ping An Insurance Group Co. OTCPK:PNGAY

(NR for Group)

A2/A subsidiary

-32.55%/

-8.59%

2.24% 4.09%
China Minsheng Banking OTCPK:CMAKY NR/BBB

-31.23%/

-4.23%

3.11% 3.22%
Industrial Bank Co Ltd. {601166} Baa2/NR

-19.26%/

-5.97%

NA 2.50%
China Merchants Bank OTCPK:CIHKY Baa1/BBB+

-28.01%/

-1.51%

4.97% 2.09%
Shanghai Pudong Development Bank {600000} Baa1/BBB+

-9.83%/

0.82%

NA 2.07%
Citic Securities Co. OTC:CIIHF Baa1/BBB -43.61%/ -20.96% NA 1.63%
Bank of Communications Co. OTCPK:BCMXY A2/A-

-35.44%/

10.05%

6.82% 1.54%
Kweichow Moutai Co Ltd. {600519} NR/NR

-10.57%/

-10.16%

NA 1.47%
Haitong Securities Co Ltd. OTC:HTNGF NR/BBB

-29.58%/

-10.11%

0.00% 1.45%
Agricultural Bank of China OTCPK:ACGBY A1/A

-31.01%/

-10.08%

8.08% 1.43%
China Vanke Co. Ltd. OTC:CVKEY Baa1/BBB+

3.41%/

-12.83%

4.58% 1.31%
Bank of Beijing Co. Ltd. {601169} NR/NR

-17.62%/

-3.22%

NA 1.22%
Indus & Comm Bank of China OTCPK:IDCBY A1/A

-37.64%/

-6.77%

7.46% 1.10%
CSR Corporation Ltd. OTCPK:CSRGY NR/NR

-66.30%/

-24.20%

NA 1.09%
Inner Mongolia Yli Industrial Group {600887} NR/NR

-63.26%/

-14.36%

NA 1.04%
Click to enlarge

It is obvious that every company in the top 15 has sustained a tremendous r loss over the past year along with the majority of the ETF holdings. There are some bright spots since the start of the year, such as Bank of Communications, BCMXY, up 10.05%. Overall it has been quite painful for shareholders in the ETFs along with the individual holdings. The ratings listed here are based upon the long term debt of the companies and not their equity ratings. Due to the capricious nature of the companies we decided not to do a credit analysis at this time. In the future, we will revisit this or another China ETF and do a thorough credit analysis. It should be noted, that companies in the ETF that apply for credit ratings tend to be investment grade or above. Companies in this ETF which would have a lower or "junk" rating usually do not bother applying for a rating. It is simply the nature of the China credit markets, i.e. "Panda" and "Dim Sum" bonds, that companies are not pressed to apply for a rating until they reach investment grade. At the present time Moody's has rated 18.02%, while S&P has rated 20.21% investment grade or above, of the top 15 holdings. Overall the top 15 holdings represent 27.25% of the ETF, while the remaining holdings represent 72.68% plus reserve requirements. These ratings represents 66.12% and 74.16% respectively, of the top 15 holdings. It is interesting that 72.30% of the top 15 (or 18.95%) are listed on US exchanges as either ADR's or foreign companies. As more companies in the index seek a larger global footprint amongst customers and investors they will also meet the regulatory hurdles and issues necessary for listing as ADRs.

Before we shed light on the issue with the MSCI possible inclusion of A-shares within the next quarter, we decided to review the performance, fees and growth opportunities of the ETF and its holdings.

ASHR's Performance and Fees as of April 27, 2016

Category

ASHR

[ETF]

CSIN0301

[Index]

Net Expense Ratio 0.80% NA
Turnover Ratio 58.00% NA
YTD Price Return

-5.72%

-15.02%

1-Year Price Return/Total return

-51.09%/-35.44%

-34.14%

Distribution Yield/SEC Yield 1.00%/2.92% NA

Beta,(1-yr) versus CSI 300

2.05

1.00
P/E Ratio FY1/current 13.22/11.36 NA
Price/Book Ratio FY1/current 1.88/1.64 NA
Click to enlarge

The net expense ratio of .80% is slightly above the asset class median of .50%, but acceptable. The turnover ratio at 58% is significantly above the asset class median of 21% and is indicative of the passive selection process of the fund manager and the general nature of China A shares. We don't expect this to be lower anytime in the near future.

It is fairly obvious the performance numbers are quite poor. The performance numbers also vary from the sponsor to other sources. This is attributed to both the pricing date of the fund and whether the return considers a total return and distribution. As such, results tend to vary from source to source. Our figures cited are based upon our own analysis of the prices of the fund and the index and are accurate to date. The total return figure takes into consideration a capital gains distribution that may have figured "phantom taxation" for retail shareholders at year end. Recently, in the past month the fund has been improved with the fund up 1.68%, while the index is -1.28%. As noted the Beta is quite high and not for the faint of heart. There is no doubt that this will continue into the foreseeable future.

Overall, we tend to like the fund for a few key reasons. Last summer MSCI stated requirements they needed for the inclusion of A-shares into the index. The China regulators met all their stipulations. This month MSCI is to poll their institutional investors and consider their comments and recommendations as to whether the key is right to add constituents to their index. The announcement is expected in June. Many short and long term investors will attempt to "front run" the announcement or buy options on the ETF. Others will simply wait for the announcement before committing. In addition, tracker funds and those that are committed to achieving returns in excess of the index will buy as well. Our second reason for buying is that many of the companies in ASHR are due for a rebound as the economy in China maintains it footing over the year and continues to grow, albeit at a slower pace than previous years. In general we feel that the time is appropriate to invest in ASHR. In addition, as noted there are options on ASHR, and the opportunity to buy or sell the tracker, ASHX, which provide the added benefit of investors to have the opportunity to hedge or partially hedge pricing and currency exposure.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Information and data was obtained from the following sources: Yahoofinance, Fidelity.com, xtf.com, Morningstar.com, ft.com,Bloomberg.com, csiindex.com, etfus.deutscheam.com, Deutsche Bank ETF team members and my own analysis

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.