As I mentioned in a recent edition of Peter’s Perspective (“What has 3 legs… but can only stand on 2?”), I visited the University of Washington (UW) earlier this month.
It was a pleasure to catch up with the Chief Investment Officer (CIO) of the US$3 billion university endowment.
He and his team returned 6.80% last year, a fantastic performance when compared to the average hedge fund 1.53% return.
We talked about his great year.
What was his out-performance largely attributable to?
Yep. The CIO discussed how China, that market that everyone loves to hate right now, has become a growing presence in their portfolio.
Importantly, although it is a ‘core’ position, they can still be tactical. That means taking money off the table at the right time.
And that’s exactly what they did in May of last year… it was turning into a bubble he said.
Readers may recall we made the same statement a month later in June (“This Is A Bubble”) when the China market was 2.5% off its bubble peak.
The CIO and his team locked in great gains and had a fantastic year.
I also spent some time with them walking around the campus.
Now, when I was a young man I had the great fortune of being the first in my family to go to university. It wasn’t easy getting there. I worked hard to save up for my tuition.
I did everything from spraying weeds, to cleaning sewers… working on the wharves as well as the freezing works. But I managed to work my way through the University of Waikato in New Zealand with a degree in Economics.
Last year I was honored to be invited back to receive a Distinguished Alumni award.
Touring the Washington campus last week… well… times sure have changed!
The car park was full of expensive European cars. This turned out not to be hugely surprising because there was a gigantic multi-storey Audi dealership on campus!
Hang on, students buying expensive cars?
I guess you already know where I’m going with this… China.
Specifically, Chinese students.
Just take a look at the numbers. The chart below shows the total number of international Chinese graduates and undergraduates at UW from 2010 to 2014.
In just 5 years the number has tripled.
Just think about the financial implications here for a moment.
In 2010 there were a total of 1,125 Chinese international students.
By 2014 there were 3,599.
That’s an additional 2,474 students.
Now, that may not sound like much, but if you consider UW international tuition fees of US$45,714 paid annually by those additional 2,474 students, that adds up to nearly US$115 million every year.
That’s just tuition fees alone. We’re not even including all the accommodation and discretionary spending here.
And it’s happening at universities all across the U.S.
While out at lunch with some of the CIO’s team, the conversation turned to real estate. A very experienced senior fund manager I had met years ago was there.
She has been in the market trying to buy a home for over six months.
She had been outbid on three occasions for properties she wanted. Outbid by whom?
Chinese students (or rather their parents).
Stories like this are being told all over the world. From San Francisco, to New York, Vancouver, London, Sydney, Melbourne and Auckland.
This headlong rush by Chinese families to buy real estate around the world is more than a need to put a roof over the head.
No, it is a massive rush to get money offshore, out of China. It is a family insurance policy.
It is partly a desire to diversify, but more importantly it is a bolt hole to protect the family’s longer term existence from the perceived risks at home.
These are not just financial risks.
Sometimes price does not matter. Paying a higher price simply means that you have more money locked up outside China.
Investment return is not the key determinant.
Money will continue to pour out of China into quality real estate, especially in countries with property rights and good rule of law… safe jurisdictions.
So let me summarise why I say “China is EVERYWHERE”:
- I was invited to speak to the MBA class about China (and Hong Kong).
- The university I spoke at has seen a 220% increase in international Chinese students in just 5 years.
- The CIO of the $3bn endowment attributed a large part of his fantastic 2015 to successfully tactically investing in China.
- Chinese buyers are not just pushing up local real estate prices but setting up businesses as well…
- … and these students are backed by significant wealth.
And you can’t ignore the Chinese (and Hong Kong) equity markets. You don’t have to be long right now, but there are good companies trading at good prices right now.
Take a read of Tama’s piece from late January on one idea how to approach getting back into these markets (“The Stress-Free Way to Buy Stocks in a Bear Market”… Sun Hung Kai is up nearly 15% since then).
In the meantime, I remain firmly of the opinion that we will have opportunities for significant gains in China-related stocks in the next few months.
I look forward to bring them to you in our subscription service, The Churchouse Letter.