The Complexity of Public Funds!

As the earnings season comes to a close, the latest performance reports from public mutual funds reveal a complex landscape of gains, losses, and shifting investor sentimentThe first quarter of 2023 has been defined by terms like “underperforming the market” and “portfolio adjustments” within the realm of equity public funds.

By the end of March 2023, public funds held A-shares worth 5.74 trillion yuan, representing 7.99% of the total market capitalization of A-sharesThis is notably higher than the holdings from foreign capital, private equity, and insurance companies, positioning public funds as the largest institutional investors in the A-share market.

The profit model for public funds primarily hinges on management fees, and with large management scales naturally comes significant profitabilityIn the first quarter of this year, net profits for equity and hybrid funds reached impressive figures: 113.89 billion yuan for stock funds and 93.60 billion yuan for hybrid funds, marking a substantial financial windfall for the fund companiesHowever, it's important to note that the returns for investors have not mirrored these gains.

According to data from iFinD, stock funds averaged a return of only 5.25%, with a median return of 3.75%, while hybrid funds averaged 2.52% with a median of 1.72%. In contrast, the Shanghai Composite Index saw a growth of 5.94% in the same quarter, and the Shenzhen Component Index increased by 6.45%. This suggests that the majority of equity funds have failed to outperform the market since the beginning of this year, a disappointing turn of events that has surprised many market observers.

The underwhelming performance of these funds is linked to extreme market volatility

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While the overall performance of the Shanghai and Shenzhen indices was promising in the first quarter, the disparity between various sectors was starkThe TMT (Technology, Media, and Telecommunications) sector, bolstered by a slew of favorable news, experienced explosive growth, leading to the emergence of speculative stocks.

In stark contrast, traditional blue-chip stocks, represented by indices like the Moutai index, and emerging industries, such as those in the Ningde ecosystem, have underperformed significantlyThe two aforementioned indices continue to feel the repercussions of the excessive pricing seen in the previous bull market.

Many of the heavily invested stocks held by public funds are centered around these traditional blue-chip stocksFor instance, the market value of Kweichou Moutai held within these funds reached a staggering 150.83 billion yuan, making it the top holding, while CATL (Contemporary Amperex Technology CoLimited) boasts a held value of 113.69 billion yuan, ranking secondOver a thousand funds are invested in both companies, illustrating a significant concentration on established stocks without tapping into the market's contemporary hotspots, a key reason behind the underperformance against the market.

Among the public fund managers, the standout performer in the first quarter was Cai Song Song, known for his heavy investments in the semiconductor sectorHis five managed funds achieved over 14% returns, with the Nuoan Active Return Fund leading the pack at nearly 50% quarterly growth, marking it as the top active equity fund for the period.

In addition to Cai, the ten best-performing equity funds in the first quarter predominantly focused on the TMT sector and other technology-driven avenues

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Conversely, the ten worst-performing funds concentrated on manufacturing industries, particularly in renewable energy.

The disparity in performance metrics across the funds underscores the extreme classification of the market; successfully betting on the right sector could lead to a bull market, while incorrect choices could hastily propel one into a bear market.

Faced with the polarizing market, many fund managers chose to make significant changes to their portfolios, clustering their investments around AI and technologyAs aptly captured in the phrase, “not buying AI means waiting to die, chasing AI also means waiting to die; it’s better to take a gamble in the hope of survival.” This realization has characterized the current environment within the fund industry.

Research reports from Shenwan indicate that, as of February this year, only 45 funds heavily focused on the TMT sector, but by March, this number skyrocketed to over 300—an almost sevenfold increaseBy the end of March 2023, active equity funds positioned an aggregated market value of 470.7 billion yuan in TMT stocks, reflecting a significant rise of 116.3 billion yuan from the previous quarter.

In parallel, the number and aggregate value of funds focused on renewable energy have steadily declinedInitially, nearly 300 funds targeted the sector, but by early April, that number had dwindled to under 150, with total assets plummeting from 380 billion to 223.3 billion yuan.

Even star fund managers with distinctive investment styles cannot dismiss market trends

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For instance, Zhang Kun’s flagship fund, the E-Fund Asian Select, began increasing its technology sector holdings significantly, acquiring stocks from AI-centric companies like TSMC, Meituan, Alibaba, and JD.com.

Similar movements are evident in other prominent fundsXie Zhiyu’s Xingquan Huirun also showcased an injection of fresh AI-oriented stocks into its top ten holdings by the end of the first quarter, including emerging players such as Lanqi Technology and Jingchen Co., thus reflecting the sector's allure.

In examining the direction of portfolio adjustments among public funds, KIS Technology has emerged as a favorite among newly launched funds, particularly gaining traction among investors in the spaceBy the end of the first quarter, a total of 614 funds had KIS in their portfolios, an increase of 313 compared to the end of last year, marking its return to the top ten major fund holdings in what appears to be a bullish reentry into the market.

Despite the impressive growth within the AI and tech sectors, it seems that the reshuffling of public funds is just beginningAnalysis by Haitong Securities suggests that in the first quarter of 2023, the technology sector's proportion within fund portfolios rose by 5.5 percentage points, leading to an over-weighting of 4.1% in comparison to the industry's market representation in the CSI 300.

Historically, major adjustments in public funds tend to persist over four quartersExamples abound, such as adjustments from the real estate chain towards the TMT from 2012-2013, followed by a pivot from TMT to liquor from 2016-2017, and more recently from liquor to renewable energy from 2020-2021.

Given this dynamic backdrop, several funds focusing on manufacturing and consumption have begun making significant moves toward AI, seemingly ignoring the established industry trends

A noteworthy change was observed in the Huitianfu Emerging Consumption fund, once heavily invested in liquor and skincare companies, which has started to pivot towards TMT stocks heavily in the first quarter, with two out of its top three holdings now in media and gaming.

Even more remarkably, the Hai Fu Tong Advanced Manufacturing A fund, which previously specialized in renewable energy stocks, dramatically shifted its major holdings to nearly entirely consist of AI-focused companies in the first quarter.

In light of the fluctuating industry styles over recent years, occurrences of funds shifting their styles to address short-term performance rankings and scaling management has become increasingly commonFor instance, in 2021, funds centered around education and internet themes significantly transformed their holdings towards semiconductor industries, while at the close of 2022, many entertainment-centered funds pivoted towards automobile and TMT investments—a stark contrast to their prior commitments.

When viewing the trend of AI-focused investments from a cross-industry perspective, the significant deviation in thematic funds showcases an opportunistic approach that could be perceived as misaligned with original mandatesThis short-sighted and impulsive investment strategy may yield short-term benefits but is unlikely to secure lasting success in the longer term.

What remains consistent is that nobody can definitively predict when market winds will shift.

Amidst the surge in AI investment, some fund managers continue to adhere to their original investment strategies, awaiting a market trend revival

For example, Zhang Kun’s flagship fund, the E-Fund Blue Chip Select, remains focused on consumption sectors such as liquor, while Ge Lan’s leading fund in China Europe Medical Health remains committed to the CXO and innovative pharmaceutical supply chains.

Although sectors like technology and AI may not yield immediate hype compared to AI, traditional sectors like consumption and pharmaceuticals harbor unique growth advantages that sustain long-term benefitsThe capacity to generate consistent earnings acts as a solid foundation for long-lasting market performance, marking them as enchanting views in the capital market.

This year, renewable energy stocks have seen a retreat among various fund managers, but a few continue to maintain their commitmentA prime illustration is Liu Gesong’s GF Small Cap Growth fund, known for its focus on renewable energy, holding eight of its top ten positions within the sector by the end of the first quarterThe prominent top five stocks include Jinko Solar and Sungrow Power Supply, evidencing a solid affinity for renewable energy among its holdings.

Additionally, figures such as Feng Mingyuan from Xinao, Fu Pengbo from Ruiyuan, and Li Xiaoxing from Yinhua have escalated their investment in renewable energy, representing a counter-cyclical approach to investing.

In the context of emerging tech themes, one notable distinction between the sectors of renewable energy and AI lies in the well-earned profitability that renewable energy companies have demonstratedCompanies in the renewable energy sector, which once boasted extraordinarily high price-to-earnings ratios, have now transitioned to being undervalued blue-chip stocks following a significant surge in performance in the recent years.

Currently, the PE ratio for renewable energy stands at around 15, reflecting historical lows

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