Exploring the Performance of Chinese ADRs–Watch out Below!

/Exploring the Performance of Chinese ADRs–Watch out Below!

Exploring the Performance of Chinese ADRs–Watch out Below!

By | 2017-08-18T17:05:16+00:00 November 24th, 2014|Uncategorized|4 Comments

Due to the recent IPO craze associated with ALIBABA, we received increased interest from investors wanting to learn more about Chinese stocks. To get a sense for Chinese ADR performance we conducted a high level analysis on Chinese ADRs.

Data Description

Backtested period: 07-01-1995 to 12-31-2013.

Universe: We screen Chinese ADRs in Bloomberg and collect their CUSIPs as the identifier. For missing CUSIPs, we manually update them by searching the internet. As of September 31st, there are 275 Chinese ADRs. We use this list as the starting universe, but should note we could not identify all the Chinese ADRs in our databases.

Portfolio construction: We construct the portfolio on July 1st every year, and buy & hold until June 30th the next year.

Returns are gross of all fees and represent total returns to include dividends and distributions.

Legend

  • CHN_ADR_VW: Annual buy & hold value-weighted Chinese ADR returns.
  • CHN_ADR_EW: Annual buy & hold equal-weighted Chinese ADR returns.
  • Shanghai Index: Shanghai Exchange Composite Index.
  • SP500: SP500 Total Return Index.

Below is the descriptive statistics on Chinese ADRs which we have identified.

Descriptive Statistics

Due to the small number of stocks and small marketcaps, quantitative analysis is challenging in the early years.  Below are the market cap distribution results from 1994 to 2013. Since there is only 1 stock in July 1994, we start our backtest from July-1995.

2014-11-06 11_33_29-Microsoft Excel - CHN ADR stats 2014.11.06.xlsx

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Summary Statistics

The statistics look promising. The value-weighted strategy generates a 14.63% CAGR, which significantly outperforms both the Shanghai composite index and the SP500 total return index. However, the volatility is insane: ~40% volatility, ~78% drawdown.

2014-11-06 11_37_12-Microsoft Excel - CHN analysistool_v30.xlsm

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Note that the CHN_ADR_VW is more correlated to SP500 (50.24%) than to Shanghai Index(34.00%).

Invested Growth

2014-11-06 11_37_47-Microsoft Excel - CHN analysistool_v30.xlsm

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Major Drawdown Problems? …YES!

Historically, buying and holding Chinese ADRs suffers serious pain. It was scary enough during the 78.20% drawdown between 07-1997 and 08-1998. However, there was a 35.97% drawdown 3 months later, from 11-1998 to 02-1999. What’s more, 4 months later, investors suffered  a 52.09% drawdown form 06-1999 to 02-2000. You think this is the end? NO! From 04-2011 to 11-2012, there was a 35% plus drawdown. This type of volatility would test the will of even the most hardened investor.

2014-11-06 11_38_53-Microsoft Excel - CHN analysistool_v30.xlsm

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

 

 Conclusion

On Friday, for the first time in more than two years, the Chinese central bank cut the interest rate. The market reacted positively. Look at the following ETFs which track the China mainland market: big surge!

2014-11-21 16_46_23-3-BLOOMBERG

For story based investors, they might be excited by this news. However when you look at the evidence, we know the Chinese markets can be extraordinarily volatile and it was better to buy Chinese ADRs instead of the Shanghai Index.

Be careful as you tread into the Chinese markets…

 

 


  • The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. Our full disclosures are available here. Definitions of common statistics used in our analysis are available here (towards the bottom).
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About the Author:

Yang Xu
Mr. Xu is currently a managing member of Alpha Architect, where he leads the capital markets group and assists in quantitative research. Mr. Xu has unique skills related to "big data" analysis. His recent research investigates various proprietary trading algorithms, tactical asset allocation models, and longer-term security selection models. Prior to joining Alpha Architect, Mr. Xu was a Principal Data Analyst at Capital One, where he was a member of the Basel II data analysis team. Mr. Xu graduated from Drexel University with a M.S. in Finance, and from the University of International Business and Economics in Beijing, China, where he earned a BA in Economics.

4 Comments

  1. Michael Milburn November 24, 2014 at 6:14 pm

    Wes, Have an off-topic question. Do you have any pointers for studies that look at

    A) very long term buy/hold investing – like looking at buy stocks today that have certain fundamental characteristics, and just hold them for 5, 10, 20+yrs. Basic question here is that most studies seem to often show more frequent cycling of positions seems to help returns a bit, but guys like Buffett just buy and hold for decades and I wonder if maybe something changes on that level of time.

    B) studies that look at buying stocks based upon relative ranges of their own past fundamental multiples (example: lowest to highest P/bk, PE, PS, in 5-7 yr period or similar? Note relative to their own historical multiples – not relative to the universe of other stocks, but just to themselves? Idea is if a stock is trading at a low or high fundamental multiple vs. itself (regardless of whether it’s low or high compared to the market) – is that a quantitative indicator w/ any predictive ability?

    I did a few google searches but can’t seem to even find the right search terms, but if you have any pointers I’d appreciate.

  2. Sebastien Hitier January 2, 2015 at 1:25 pm

    Wow perf x5 better than sp500… What happens with absolute momentum to switch back to spy then to treasuries? If you can send me the monthly returns, I am happy to check.

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