China’s biggest fund manager curtailed stocks exposure in second quarter as hedge against lofty valuations

·3-min read

China’s biggest mutual fund manager cut equity holdings in the second quarter of this year to stave off risks stemming from elevated valuations that complicate investors’ stock picks and temper expected returns.

Zhang Kun, whose 134.5 billion yuan (US$20.7 billion) in assets under management outrank any other domestic money manager in China, lowered positions in each of his four funds, according to the funds’ quarterly reports. He made the most aggressive cut in a fund focusing on smaller companies, slashing exposure to these stocks by 23 percentage points, compared with the previous three-month period. Adjustments to the other three funds were all below 7 percentage points.

Zhang’s actions underscore how demanding stock picks can be for investors after the so-called stampede trades drove the valuations of popular bets such as consumer stocks to record highs last year. While these crowded trades began to unravel at the start of this year, some of the stocks are still expensive despite giving up part of their outsize gains.

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Investors should temper their expectations this year because of stretched valuations, according to Zhang, who works for E Fund Management in the southern Chinese city of Guangzhou.

“The current market environment is very demanding for investors’ judgments,” he said in the quarterly fund reports. “If the judgment is right, you may only reap returns that match or are slightly higher than the discount rate over the next five years. Once it is wrong, you may face a 30 per cent, or even 50 per cent, drop in share prices.”

Consumer stocks, particularly liquor producers, bore the brunt of Zhang’s move. In one fund, he cut the holding of Kweichow Moutai by about a fifth to 1.1 million shares last quarter and halved the position of Wuliangye to 5.3 million shares, according to the quarterly reports.

A gauge tracking consumer stocks trading on China’s onshore market is valued at 37 times earnings, according to Bloomberg data. While the multiple is down from an all-time high of 48.5 times seen in February, it is still above the five-year average of 28.9 times, the data shows.

Meanwhile, Zhang added holdings of technology and pharmaceutical stocks such as Tencent Holdings and Aier Eye Hospital Group to the funds he manages in the second quarter, according to the portfolio reports.

After a successful 2020, Zhang’s funds have delivered mediocre performances this year, with two reaping returns and two recording losses. His E Fund High-Quality Enterprise 3-Year Maturity Mixed Fund, which returned 4.9 per cent, was the best performer, while his E Fund Asian Elite Fund lost 13 per cent, and was the worst performing of his funds.

Zhang started as a fund manager about a decade ago, after working as an industry analyst and an assistant to money managers at E Fund. He has worked in the asset management industry for 13 years.

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