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When it comes to China\u2019s biggest technology stocks, some investors are finding there can be too much of a good thing.<\/p>\n
Take\u00a0 Shi Bin, a portfolio manager at UBS Asset Management (Hong Kong).\u00a0One of the top stocks in his UBS (Lux) China Opportunity equity fund is Tencent Holdings, which has soared 70% this year.<\/p>\n
So far, so good. But it\u2019s hard competing with the likes of the MSCI China Index because he is hobbled by regulations that restrict funds\u2019 allocation in any single stock to 10%. Tencent\u2019s MSCI China weighting is 16.3%.<\/p>\n
\u201cWe were lucky to have beat the index,\u201d Hong Kong-based Shi said in an interview during a visit to Taipei.<\/p>\n
\u201cIt would be a real headache for us if Tencent shares continue to surge, as it\u2019ll be difficult to find better bets.\u201d<\/p>\n
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\u2019s also heavy on fellow Internet giant Alibaba Group Holding, with a 9.6% allocation.<\/p>\n
The two companies have been the biggest drivers of the MSCI China Index\u2019s 40% rally this year: Alibaba\u2019s stock price has nearly doubled. Tencent gained as much as 1.1% in Hong Kong on Friday.<\/p>\n
Shi\u2019s China Opportunity fund, which has total assets of $2.2 billion, has returned 43% this year.<\/p>\n
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\u2019s US-traded shares have soared 173% in 2017.<\/p>\n
Frank Tsui, a fund manager with Value Partners Hong Kong, said he\u2019s been hearing more complaints about the 10% limit as Tencent and Alibaba climb.<\/p>\n
\u201cManagers with an objective to outperform a benchmark index while having to mind the tracking error would feel a bit more pressure,\u201d he said.<\/p>\n
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.<\/p>\n
\u201cIt\u2019s a fund manager\u2019s responsibility to not put all eggs in one basket, and we\u2019ll find more quality companies like Tencent and Alibaba,\u201d he said.<\/p>\n
The 10% rule was established as part of a code of conduct, with the China Securities Regulatory Commission saying fund managers should adopt a \u201cscientific and reasonable\u201d strategy and risk controls when investing in equities.<\/p>\n
\u201cI hope this limit will be scrapped,\u201d said Bruce Hsu, whose Allianz Global Investors China Strategic Growth Fund lags MSCI China with an 18% gain this year. \u201cIt is enacted purely because the financial markets are not mature enough. Asian markets will need to draw closer to developed markets sooner or later.\u201d<\/p>\n