Value Partners expects quick expansion in its new China B- and H-share fund, set up to arbitrage inefficiencies in Chinese equity markets. The offshore fund last month won official blessing from the Hong Kong Securities and Futures Commission. Value Partners hopes this will pave the way for a ballooning of the most heavily China-oriented of its three funds. 'Currently, the fund is about US$15 million,' fund manager Jacky Choi said. 'But we are targeting to grow the fund perhaps to US$100 million or US$200 million in about three to five years.' The boutique fund management firm's Value Partners A and Manulife China value funds have almost consistently out-performed the markets, putting them among the top-performing mainland-related portfolios globally. The youngest B- and H-share fund, launched in July of last year, is about 70 per cent invested in B-shares and H-shares. The fund also invests in red-chips and Hong Kong companies with major exposure in China. B-shares are Hong Kong and US dollar denominated shares traded on the Shenzhen and Shanghai stock exchanges, while H-shares are issued by mainland-incorporated companies listed in Hong Kong. Red-chips are mainland-backed firms incorporated and listed in Hong Kong. While a few institutional investors from Hong Kong and Japan have dominated the fund, Mr Choi expected the SFC approval to woo more retail investors. The fund pulled off a year-to-date return of 61 per cent to 62 per cent. 'Our value added here is to invest in quality B-share companies that are actually trading below the market average in terms of price-earnings ratio or discount to A-shares,' Mr Choi said. B-shares now trade at 20 to 30 times earnings. The ratio was 9.6 for the fund's pickings of B- and H-shares on September 28, helping it to weather recent wild swings in market sentiment. Previously, B-shares were the preserve of foreign investors with hard currency. Upon the inception of the China B- and H-share fund last year, B-shares were trading at a 70 per cent discount to the yuan denominated A-shares due to lack of liquidity. The B-share market was also about a 10th of the A-share market by capitalisation. Rallies after Beijing's decision to open the B-share market to domestic investors in February initially narrowed or even eliminated the valuation gap. 'But after a few months of big corrections and heavy profit-taking activities, now the B-share market is trading at 40 to 50 per cent discount to the A-share market,' Mr Choi said. B-share prices also took a heavy beating from a mainland clampdown on market irregularities. The fund shed 21 per cent in the third quarter, smaller than the respective 30 per cent and 35 per cent losses in Shanghai and Shenzhen B-share indices. When a heavy wave of sell-offs in September depressed H-share prices below seven times their earnings, the fund offloaded some B-share holdings to acquire H-shares. 'H-share companies are actually more efficiently managed than B-share companies,' said Mr Choi. 'The growth potential for some of these companies is even better than the B-share companies. If you do the right pick, you can find some interesting companies that can outperform in the long term because of the huge valuation gap.' The fund has invested in the likes of mainland online ticketing company TravelSky Technology, Shenzhen real-estate developer China Vanke and car-maker Qingling Motors.