When it comes to China’s biggest technology stocks, some investors are finding there can be too much of a good thing.
Take Shi Bin, a portfolio manager at UBS Asset Management (Hong Kong). One of the top stocks in his UBS (Lux) China Opportunity equity fund is Tencent Holdings, which has soared 70% this year.
So far, so good. But it’s hard competing with the likes of the MSCI China Index because he is hobbled by regulations that restrict funds’ allocation in any single stock to 10%. Tencent’s MSCI China weighting is 16.3%.
“We were lucky to have beat the index,” Hong Kong-based Shi said in an interview during a visit to Taipei.
“It would be a real headache for us if Tencent shares continue to surge, as it’ll be difficult to find better bets.”
Shi has almost maxed out on his Tencent allocation, which had a 9.9% weighting in his fund as of the end of July. He’s also heavy on fellow Internet giant Alibaba Group Holding, with a 9.6% allocation.
The two companies have been the biggest drivers of the MSCI China Index’s 40% rally this year: Alibaba’s stock price has nearly doubled. Tencent gained as much as 1.1% in Hong Kong on Friday.
Shi’s China Opportunity fund, which has total assets of $2.2 billion, has returned 43% this year.
His top 10 holdings also include Internet companies Baidu – whose American Depository Receipts have risen 42% – and NetEase, which has gained 28%. The standout performer is TAL Education Group, which has the biggest allocation. The after-school tutoring provider’s US-traded shares have soared 173% in 2017.
Frank Tsui, a fund manager with Value Partners Hong Kong, said he’s been hearing more complaints about the 10% limit as Tencent and Alibaba climb.
“Managers with an objective to outperform a benchmark index while having to mind the tracking error would feel a bit more pressure,” he said.
Tsui expects the cap to remain for the next decade at least. Eric Lin, whose Eastspring Investments China Fund has returned 20% this year, said it should encourage diversification.
“It’s a fund manager’s responsibility to not put all eggs in one basket, and we’ll find more quality companies like Tencent and Alibaba,” he said.
The 10% rule was established as part of a code of conduct, with the China Securities Regulatory Commission saying fund managers should adopt a “scientific and reasonable” strategy and risk controls when investing in equities.
“I hope this limit will be scrapped,” said Bruce Hsu, whose Allianz Global Investors China Strategic Growth Fund lags MSCI China with an 18% gain this year. “It is enacted purely because the financial markets are not mature enough. Asian markets will need to draw closer to developed markets sooner or later.”