What are Medalist Managers Buying in China?

Funds are rebuilding positions in tech, but not in Alibaba.

Kate Lin 07 June, 2022 | 14:35
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The news of lockdowns in major Chinese cities like Beijing and Shanghai speed up the correction in China markets in 2022. The Morningstar China Index plunged 15.4% between January and May, compared to a loss of 21.1% for full-year 2021.

In this environment, what have been high-conviction names that medalist fund managers have stuck to? And what are some new money purchases? We looked at four China equity and greater China equity funds that are rated Bronze or better and had three observations.

Alibaba has Fallen Out of Favour

Greater China funds managed by JPM, FSSA, and Value Partners all exited their positions in China’s largest e-commerce platform Alibaba. Both JPM Greater China and Value Partners had no positions in Alibaba going into 2022 and the latest figures (until end-April for the JPM fund and until end-March for the Value Partners fund) show that the decision has not been reversed, even as the earnings of Alibaba have started to see signs of a turnaround.

This does not mean that the managers shied away from Chinese e-commerce completely. In fact, managers have shown greater conviction in Alibaba’s rival, JD.com. JPM started building exposure to JD in January and since then has topped up its position. Value Partners also created a position in JD in the first quarter of 2022 and has stuck to its Pinduoduo holdings.

Fidelity China Focus took a contrarian call, at least versus the three medalist funds named above. The value-style fund has added almost 6 million shares in Alibaba’s Hong Kong listing and a relatively smaller amount in the US-listed ADR. Other than Alibaba, the Fidelity portfolio has grown its exposure to Chinese Internet companies. Since the start of 2022 through April, the fund increased exposure to Trip.com (09961, TCOM) and Baidu Inc (09888, BIDU). Meanwhile, video streamer iQIYI Inc (IQ), online property platform KE Holdings Inc (BEKE), delivery firm Meituan (03690), property software provider Ming Yuan Cloud Group (00909) were added for the first time.

Aside: The ADRs of iQIYI and KE have been identified by the US regulators as companies that have provided a lack of, or incomplete, access to the relevant oversight body to investigate the audit of their financial statements.

 

Mixed Reactions to China Merchants Bank Probe

One of the major events that occurred in the period was a corruption probe into China Merchants Bank (03968, 600036)’s former president. What has been done by fund managers as the event unfolded?

FSSA Greater China Fund’s share holdings in the stock have increased from July last year to March 2022. The exposure remained unchanged through April. Because of the drop in share price, the bank became the third largest fund holding in April.

Fidelity China Focus was the fund that topped up its exposure to the bank in the month of April. While the fund has been an owner of the bank’s Hong Kong-listed shares, the addition was made by buying onshore shares in China Merchants Bank, but the exposure is minimal equivalent to 0.09% of the fund’s total net assets.

JPM chose to trim its exposure, selling a total of 1.43 million shares in April. Factoring in the price movements, the exposure was reduced to 3.20% from 3.66%. Shares in the H-shares listing, which weighed 1.06% at the end of April, were unchanged.

 

What Else are Managers Buying?

April additions to the JPM Greater China Fund were partly thematic, with managers betting on the fast-growing renewables sector in China. The investment theme follows the footsteps of the Chinese authorities’ pledge to peak carbon emissions by 2030 and zero them out as late as 2060. For example, wind power operator China Longyuan Power Group (00916), and hydroelectricity energy provider China Yangtze Power (60090) were new to the portfolio in 2022. NARI Technology Co (600406), which specializes in power grid automation, was also added to the portfolio in April. Each of these names now represents around 1% of the fund assets.

 

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Kate Lin

Kate Lin  is a Data Journalist for Morningstar Asia, and is based in Hong Kong

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