Zhang Kun, China’s biggest money manager, sticks to bets on giants like Tencent and Kweichow Moutai, looks past lack of dividends so far

Valuations of ‘lots of high-quality companies’ already very attractive over the long term, Zhang says in quarterly report
Zhang’s flagship fund lost 10.9 per cent of its value in the second quarter

China stock market

Zhang Shidongin Shanghai

Published: 3:00pm, 20 Jul 2023

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Zhang Kun, China’s biggest fund manager, has latched onto the country’s biggest companies – from Tencent Holdings to Kweichow Moutai – and is betting that their moating advantage will deliver sustainable returns over time, as the economy recovers, despite a dismal second-quarter showing.

The social-media and gaming company and the distiller were the two biggest holdings of E Fund Blue Chip Selected Mixed Fund, Zhang’s 49.2 billion yuan (US$6.9 billion) flagship fund, over the second quarter, according to a quarterly portfolio report published on the E Fund Management website on Thursday. Tencent and Kweichow Moutai each accounted for 9.9 per cent of the fund’s total assets, the maximum allowed for a stock in a single fund’s portfolio. Their holdings were unchanged from the first quarter.

The strategy of holding the most valuable companies has, however, not yet paid off for Zhang, with his flagship fund losing 10.9 per cent of its value in the second quarter. The CSI 300 Index of China’s biggest onshore stocks fell 5.2 per cent in the same time span, while Hong Kong’s Hang Seng Index dropped 7.3 per cent. Tencent and Kweichow Moutai slumped by 14 per cent and 7.1 per cent, respectively.

“Over the long term, the valuations of lots of high-quality companies are already very attractive,” Zhang said in the report. “It will be a good deal even if some industry captains consider taking them private.

‘The difficulty and pessimism we have encountered now may only be a blip on the forward path,’ Zhang says. Photo: Handout

“In any market and time, high-quality companies are always scarce. So we’ll stick to our current investment frameworks and continue to improve our research ability.”

Zhang, who works for Guangzhou-based E Fund Management, oversees US$12.4 billion in combined fund assets, more than any other fund manager in mainland China. On top of the blue-chip fund, he is also in charge of three other stock funds including one that invests in Asian markets beyond China. He has been managing the blue-chip fund since 2018.

The second quarter was turbulent for China’s star fund managers, as concerns deepened about its economy running out of steam on piecemeal stimulus measures. For instance, a fund overseen by top-ranked manager Qiu Dongrong, who pared his holdings of property stocks, lost 7 per cent in value in this period.

Investors gave more weight to geopolitical tensions and China’s economic slowdown in the second quarter, rather than factors such as business models and core competitiveness, when pricing stocks, Zhang said in the quarterly report.

His top 10 holdings also include leading distillers Luzhou Laojiao and Wuliangye Yibin, retail bank China Merchants Bank, CNOOC, Hong Kong Exchanges and Clearing and food-delivery firm Meituan, according to the report. All of its top 10 holdings were left unchanged in the second quarter compared with the previous three-month period.

A Mao-tai shop in Beijing. Kweichow Moutai accounted for 9.9 per cent of Zhang’s blue-chip fund’s total assets, the maximum allowed for a stock in a single fund’s portfolio, in the second quarter. Photo: Simon Song

The companies in Zhang’s portfolios have strong moating and industry thresholds for entry, and these advantages can translate into growth in profits and free cash flows that will exceed the pace of China’s economic expansion, he said in the report.

“The difficulty and pessimism we have encountered now may only be a blip on the forward path,” Zhang said. “Pessimist market expectations have already been priced in the low valuations.”

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