Active equity mutual funds that made big second-quarter rotations into technology faced a harsh July as A-share tech stocks sold off.
During the second quarter, high-dividend and consumer sectors in China’s stock market were heavily sold, while large amounts of capital moved into technology themes led by artificial intelligence and semiconductors. According to CITIC Securities estimates cited in the report, active public funds’ holdings in the electronics sector reached 42.64% at the end of the second quarter, a record high.
Since July, pressure from volatility in global chip shares and a deep pullback in A-share technology names has hit fund performance. As of the July 30 close, the ChiNext Index had fallen 25.29% for the month, the STAR 50 Index was down 28.06%, and the STAR Composite Index had lost more than 30% over the same period. Funds that entered the tech rally near the June peak then faced a sharp net asset value drawdown. Some active equity funds that switched positions in a concentrated way during the second quarter gave back all earlier gains within a month, while some newly launched funds that built positions at elevated levels quickly fell below the CNY 0.6 mark.
Veteran value investors rotated into technology
Quarterly fund disclosures showed how broadly public fund managers embraced growth and technology in the second quarter.
Much of the market attention centered on several star managers long associated with consumer and value investing. Second-quarter reports showed that Zhang Kun’s E Fund Blue Chip Select sharply reduced liquor holdings once seen as defensive anchors. Its reductions in Kweichow Moutai, Luzhou Laojiao and Wuliangye reached 47%, 52% and 71%, respectively. At the same time, Semiconductor Manufacturing International Corp. and Dongshan Precision entered the fund’s top 10 holdings for the first time.
A similar shift appeared in funds managed by Invesco Great Wall’s Liu Yanchun and Ke Haidong, as well as Fullgoal Fund’s Zhu Shaoxing. In the second quarter, Invesco Great Wall Dingyi replaced all of its top 10 holdings, fully exiting consumer and pharmaceutical names and moving into semiconductor and computing-power plays including Jiangfeng Electronics and Zhongji Innolight. Zhu Shaoxing’s Fullgoal Tianhui Growth removed Kweichow Moutai from its top 10 holdings after owning it for six years and added Zhongji Innolight.
A senior brokerage chief strategy analyst told the Economic Observer: “This kind of phenomenon is not common in history. When firm value investors also give up their stance, it often means sentiment in a single sector has gone to an extreme. A holdings ratio of more than 40% in the electronics sector easily brings to mind new energy in 2021 and Internet+ in 2015. An overly crowded trading structure is itself the biggest risk.”
Wind data added to that picture. In the second quarter, 67 active equity funds sharply increased their TMT exposure. Their average weighting in TMT was only 6.75% in the first quarter, but it jumped to 54.99% by the end of the second quarter. Using a broader definition, the number of active equity funds that significantly increased tech exposure in the second quarter was close to 300.
The cost of buying near the top
The late-June acceleration in tech stocks left a number of fund managers entering at precisely the wrong time.
In July, the entire sector retreated, with AI supply-chain names and semiconductor stocks that had logged large earlier gains taking the first hit. Active equity funds that abandoned diversified holdings during the second quarter and concentrated in technology quickly saw the damage in their net asset values. Funds that had sharply raised TMT exposure all turned negative in July, with an average decline of more than 20%. Among them, 12 funds fell by more than 40%.
Jinxin Quality Growth, managed by Tan Zhimi, replaced its top 10 holdings from healthcare-related names in the first quarter with technology stocks such as Hygon Information and SMIC in the second quarter. Its TMT weighting rose from zero to 72.35% of fund NAV. By July 30, the fund had dropped 26.34% for the month, wiping out its June gains.
Guoshou Anbao Wenhui, managed by Yan Yang, raised TMT exposure to 81.46% of fund NAV. The fund then plunged nearly 40% in July.
Yinhua Furao Select Three-year Holding Mixed also drew attention. Its manager, Jiao Wei, had been known for favoring dividend assets and consumer stocks, but in the second quarter the fund made a major switch into semiconductors and the AI computing-power supply chain. After continued declines in tech shares in mid-July cut deeply into the fund’s NAV, its single-day NAV performance began to show a significant negative correlation with the tech market, leading to market questions over whether it had sold at the bottom. As of July 30, the fund was down 10.63% for the month.
Style drift also appeared repeatedly during the technology buying wave. In the second-quarter report for CCB High Dividend Theme Fund, seven of the top 10 holdings were semiconductor or optical-module related names, including Zhongji Innolight with a 9.24% portfolio weight, as well as Eoptolink and Chipsource Micro. The report said that allocation looked at odds with the fund’s “high dividend” label and sparked wide discussion on third-party fund distribution platforms.
The article raised questions over whether such positioning deviated from product mandates and whether it undermined investors’ asset-allocation expectations built around the high-dividend label.
New funds fell below half par value
Beyond older funds struggling after portfolio shifts, newly launched products also came under pressure. In some cases, the situation was more severe because these funds built positions in technology shares near the highs.
Guotai Haitong New Energy Ruixuan Mixed Initiated A, established on June 16, focuses on new energy and related broader technology sectors. The fund launched at a par value of CNY 1, but less than two months later its NAV had fallen sharply. As of July 30, its unit NAV had dropped to CNY 0.5509, with a return of -44.91% since inception, placing it near the bottom among 5,417 comparable products.
Rongtong New Materials A, established on June 2, faced a similar problem. The fund focuses on upstream AI materials and sought investment opportunities tied to rising material prices through a demand-transmission logic running from AI capital spending to AI computing hardware and then upstream raw materials. But after the latest drop in technology shares, its NAV also suffered. As of July 30, the fund’s unit NAV stood at CNY 0.6020, with a return of -39.80% since inception.
The report attributed the losses in part to timing. Both funds built positions in June, when their target sectors were near a short-term high, and then did not take effective risk-control measures after the market turned lower in July.
A product-department staff member at a large public fund manager in South China told the reporter: “New funds do not have a historical safety cushion. Once they build positions at a market high and then run into extreme market conditions, risk gets magnified. In many cases, new fund issuance is catering to the hottest market theme of the moment. When a product is easiest to sell, that is often the tail end of the rally.”
Tech shares rebounded on July 31
On July 31, after a rebound in U.S. tech-related sectors, A-share technology stocks also opened sharply higher before giving back part of the gains. By the close, the ChiNext Index had risen 3.06% and the STAR Composite Index was up 3.69%. Multimodal AI concept stocks and the computing-hardware supply chain rebounded strongly, and nearly 4,700 stocks across the market finished higher.
The original article came from the Economic Observer’s WeChat account and was written by Hong Xiaotang and Zhang Pengrui.