Buffett disciple Zhao Danyang earns 20pc gains with China stocks

PUBLISHED : Saturday, 17 August, 2013, 12:00am
UPDATED : Friday, 27 September, 2013, 5:17pm

Zhao Danyang, the mainland investor who won a charity lunch with Warren Buffett in 2008, led his hedge funds to post returns three times more than their Asian rivals this year by shifting assets back to Chinese stocks.

Zhao's Hong Kong-based Pureheart Capital Asia has more than 80 per cent of its US$217 million in Chinese stocks traded in Hong Kong, Singapore, the United States and at home from 50 per cent at the start of the year, said Jerrie Huang, its business development manager.

The US$162 million Pure Heart Value Investment Fund returned 24 per cent in the seven months this year, Huang said. The Eurekahedge Asian Hedge Fund Index rose 8 per cent.

Pureheart returned to Chinese stocks after six years of corrections cut their valuation close to historical lows, Huang said. It decided in January 2008 to liquidate all five funds that specialised in yuan shares, with combined assets of about US$200 million, because it could no longer find any attractive investment opportunities.

"There is no doubt that the China stock market is still in a bear market," Pureheart said in a newsletter to investors last month, adding it marked a "good time for optimists" like itself. "The falling share prices will provide a very good opportunity for us to buy the carefully selected shares at a bargain."

The benchmark Shanghai Composite Index shed 61 per cent of its value from late December 2007 to the end of last week and the H-share index fell 40 per cent.

The Shanghai gauge, valued at 48 times earnings on October 31, 2007, touched a 10-year-low of 11 times earnings on June 28. The H-share index reached a 10-year-low of 7.6 times earnings on June 30, after hitting 31 times on October 31, 2007.

Pureheart's move pits it against investors such as Jim Chanos, founder of the US$6 billion hedge fund Kynikos Associates, who has warned since at least February 2010 of a pending property market slump putting China on a "treadmill to hell".

China equity funds saw investor redemptions in 20 of the past 22 weeks, EPFR Global, which tracks funds with US$19.6 trillion of combined assets, said on August 5.

Pureheart started buying Chinese stocks listed in Hong Kong and on the mainland in March 2009, seeing a rebound, only to depart again in June 2010.

Pureheart shifted the bulk of its investment back to Chinese stocks this year, Zhao said.

The price-book and earnings multiples of both the Shanghai and Hong Kong indices declined to about half of their 10-year averages this year.