Top Fund Proves Value Investing Works in China With 159% Return

(Bloomberg) -- Value investing is proving to be a profitable strategy in one of the world's worst-performing stock markets, where a gush of momentum-chasing retail money has created boom-bust cycles.

The $442-million Bank of Communications Schroder Alpha Core Mixed Fund, which focuses on picking out bargain stocks in China's onshore market, has returned 159 percent over five years. That's more than triple the total return by the CSI 300 Index of Shanghai and Shenzhen-traded shares. The fund, managed by He Shuai, has beaten all its peers in that period, according to data compiled by Bloomberg.

He relies on proprietary research to look for companies with sustainable business growth and earnings models. Limited information and research coverage leaves many stocks off investors' radars, he said, declining to comment on specific companies, citing market regulation.

“The foremost thing is to think independently, and never follow the crowd,” He said in an interview at Bloomberg's Shanghai office. “I will find stocks that are mispriced because of the information gap.”

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It hasn't been a good time for value investors in developed markets. Money managers deploying the strategy have been closing down as so-called growth stocks take over their inexpensive peers. In China, where capital controls remain and retail investors make up about 80 percent of trading volume in the stock market, speculative money has created large swings like the epic market bubble in June 2015.

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While He looks for hidden gems, he has invested in widely-held stocks as well. The fund held shares of liquor distiller giant Kweichow Moutai Co., before selling out in the first half, Bloomberg portfolio analysis show. Moutai is among stocks most traded by foreigners via a trading link with Hong Kong, and covered extensively by domestic and foreign brokerages.

Moutai fell 19 percent this year through last week, among the biggest drags on the Shanghai Composite Index. The equity gauge has lost 24 percent in 2018, as the U.S.-China trade spat, an economic slowdown and weaker currency rattled investor nerves. He's fund has slipped less than 1.5 percent, however. The Shanghai gauge rose 0.4 percent Monday.

The top 10 holdings in He's fund as of Sept. 30, accounting for almost half its weight, rose an average 7 percent this year, according to data compiled by Bloomberg. Half of those companies have no foreign analyst coverage tracked by Bloomberg. While He focuses on bottom-up approach, he prefers technology, consumption and health-care services firms due to their sustainable demand and consumption exposure.

Over five years, the fund has beaten all onshore peers with minimum assets of 1 billion yuan ($145 million), three years of history and at least half their portfolio invested in A shares, according to Bloomberg data.

Not all bets played out well. One of the fund's top holdings Meinian Onehealth Healthcare Holdings Co. has plunged 22 percent this year amid allegations relating to labor disputes and misdiagnosis. Another top holding, Changchun High & New Technology Industries (Group) Inc., has also fallen amid a vaccine scare.

--With assistance from Rachel Chang.

To contact Bloomberg News staff for this story: Amanda Wang in Shanghai at twang234@bloomberg.net;Mengchen Lu in Shanghai at mlu157@bloomberg.net;Shin Pei in New York at spei@bloomberg.net;Cindy Wang in Taipei at hwang61@bloomberg.net

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, ;Jessica Zhou at jzhou75@bloomberg.net, Kana Nishizawa, Will Davies

©2018 Bloomberg L.P.

With assistance from Bloomberg