More than 20% government ownership in an emerging market (EM) company can create a conflict between the interests of shareholders and government stakeholders, which may, in turn, affect profitability and future returns. With this premise in mind, we developed a framework allowing us to answer this question: “What impact does meaningful government ownership have on equity returns?”

China represents a very large opportunity set for global equity investors, and its economy is the perfect example of how government ownership affects a company’s performance. With China’s importance to overall emerging markets unquestioned, we figured it made sense to use that as an initial case study in this piece.

Quantifying Government Ownership: Is It Worth Owning State-Owned Enterprises?

Considering that 2017 has been a notable year for China’s equity market, we wanted to measure the impact of state-owned enterprises (SOEs) on the return of a commonly used beta benchmark such as the MSCI China Index (MXCNMSCI China Index (. To do so, we split MXCN’s constituents into SOEs and non-SOEs, and ran the following contribution to total return analysis.

Returns: SOEs vs. Non-SOEs

Year-to-date, MSCI China Index has had roughly the same exposure to SOEs and non-SOEs, with the latter segment significantly outperforming. Said a different way, MXCN can attribute almost 80% of its total return to non-SOE exposure.

How to Capitalize on the non-SOE Opportunity

Building off these observations, in 2015 we launched a less-conventional approach to tap into the Chinese equity market, focusing on those companies that are free of significant government ownership. The WisdomTree China ex-State-Owned Enterprises Index (CHXSOE) measures the performance of Chinese stocks that are not state-owned enterprises (less than 20% government owned). To measure its success thus far, we used a similar concept mentioned above and ran a performance attribution analysis for CHXSOE versus MXCN, splitting their constituents into SOEs and non-SOEs.