In autumn 2021, OLZ AG launched a new fund for risk-optimised investments in the Chinese equity market (issue date: 23.09.2021). The fund invests according to a systematic, risk-based investment process. We forecast the risk parameters of the individual securities (volatilities and correlations) and derive an optimally diversified portfolio using OLZ minimum variance optimisation. In addition, special focus is placed on liquidity and sustainability or ESG criteria. The aim of this investment strategy is to improve the risk-return profile in the medium to long term compared to the capital-weighted index. After more than twenty months since the fund was launched, it is now time to take stock (as of 31.05.2023).
The fund started in a challenging environment and was able to demonstrate the added value of risk optimisation right from the start. While the Chinese stock market - in our case the benchmark is the MSCI China Index - came under heavy pressure in the wake of corona lockdowns, the trade war between the USA and China, and general economic weakness, especially in the real estate sector, the OLZ Equity China Optimised ESG Fund was able to limit losses significantly and still participate in interim upswings.
Since its launch, the MSCI China benchmark index has suffered a cumulative loss of 32.7%, while the risk-optimised OLZ fund has lost only 16.4%. The CSI 300 Index, which receives a lot of attention in China, achieved a return of -27.3% in the same period and was thus far outperformed by our fund.
On the risk side, the OLZ strategy succeeded in reducing annualised volatility from an exorbitant 31.3% to a much more tolerable 18.9%. The maximum loss was also significantly reduced: While passive index investors lost almost half of their capital in the worst case (max. drawdown -44.6%), OLZ got off lightly and lost a maximum of just under a quarter (max. drawdown -24.1%). To illustrate what this means, it should be mentioned that a passive investor needs a return of +80.6% after such a setback to make up for the loss, while an investor in the OLZ fund only needs a plus of 31.7% to recover his initial capital.
In terms of sustainability, the OLZ approach was also able to fully achieve its goals. While the MSCI China benchmark only achieved an ESG score of 4.8 and thus a grade of BBB, the OLZ Equity China Optimised ESG increased its score to 5.8 and thus received an A grade. The CO2 intensity (Scope 1&2) was also reduced from 236 to 111, i.e. by 53%. Stocks with an MSCI Controversy Red Flag and a Fail according to UN Global Impact were completely excluded from the investment universe.
The interim balance after a good twenty months is thus entirely positive, even if the Chinese stock market is in a difficult overall field. The OLZ Equity China Optimised ESG Fund thus offers investors the opportunity to participate in the growth prospects of the Chinese economy without taking irresponsible risks.
