As the China A-shares market is receiving more attention from international investors because of its expanding market size and improved access, means of accessing the market have become an important topic. A recent research publication suggests the use of minimum variance investing as an alternative to the traditional market cap approach for accessing the China A-shares market.
There are some interesting findings in the paper regarding the China A-shares minimum variance strategy:
1) The implementation of a China A-shares minimum variance portfolio is challenging. It can result in small number of holdings and big industry bets. Well-designed constraints are keys for a successful implementation.
2) A typical China A-shares minimum variance portfolio historically outperformed its market cap counterpart (7.4% p.a.) for a 10-year period from 2007-2017. The corresponding turnover generated from the strategy is approximately 98% p.a. two-way.
3) The research results show that the China A-shares minimum variance investing is capable of achieving volatility reduction. However, the volatility reduction in the China A-shares market is lower compared with other major equity markets.
4) The minimum variance portfolio does not exhibit any systematic trend in value factor during recent years while it displays positive quality exposure. It indicates that the strategy is still some way from reaching a “crowding” level.
For more detailed discussion, please refer to “Accessing the China A-Shares Market via Minimum-Variance Investing.”, Journal of Portfolio Management, Vol. 45, No.1(2018), pp. 106-117.