China fund’s 618 per cent return in 10 years shows it’s putting money where its recommendation is

China’s struggling stock market isn’t bottoming out just yet, judging by the holdings of a fund that’s made a 618 per cent return since it started in 2008.

Beijing Longrising Asset Management, an equity-focused fund manager that oversees about 20 billion yuan (US$2.9 billion), has 10 billion yuan of that in cash. The fund’s top executives are worried about China’s economic outlook and the trade conflict with the US, and expect that the extremely bearish sentiment toward equities may take years to recover.

“There are too many uncertainties in the economy, even though a lot of stocks are starting to look attractive at these prices,“ said Zeng Xiaojie, general manager at Longrising, in an interview in Beijing last week. “We plan to keep our market exposure at a moderate to relatively low level for a while.”

Longrising illustrates the depth of pessimism among China’s domestic asset managers, saddled with trying to find winners in the world’s worst-performing major equity market. Turnover is dwindling, suggesting little appetite to buy even with shares at the lowest valuations since 2014.

Longrising’s Stock Selection Fund, the firm’s flagship strategy, has returned 618 per cent since its July 2008 inception, according to data from Shenzhen PaiPaiWang Investment & Management, which tracks so-called private funds such as Longrising. These products are open only to institutions and wealthy individuals, those deemed sophisticated enough to invest in products governed by looser rules.

The Shanghai Composite dropped 3 per cent in the same span. Still, Longrising’s fund has succumbed to losses this year, down 14 per cent through the end of July, about the same as the broad market’s drop.

The trade dispute between the world’s two biggest economies has escalated further than Longrising expected, said Lv Xiaojiu, founding partner at the firm. Lv started the fund after working at China Life Insurance Co. and brokerages, while Zeng has been ranked as the nation’s best private fund manager by the state-run China Securities Journal five times, according to Longrising’s website.

“The trade war has a big impact on our investment strategy,“ said Lv. “We have decided not to invest in industries that may be affected, such as export-driven industries including auto parts, furniture and some other light industries,” and the fund has sold shares in consumer electronics companies, he said.

To be sure, the existence of Chinese stock funds holding such high cash positions could supercharge any rebound. But Zeng says it’ll take consistent signs of an improving economy and positive policy signals before Longrising jumps back in.

Meanwhile, he is trying to find opportunities in undervalued industry leaders, and companies paying high dividends. Longrising declined to give examples.

“A number of high-quality companies are currently being traded at low valuations, because investors are sceptical about their growth sustainability,“ Zeng said. “So we are tracking the financials and operational data of these kinds of companies month-by-month, to find out which stocks have priced in too much pessimism.”