China Macro Fund That’s Made 31% This Year Is Hoarding Cash
A Macro Fund in China That’s Made 31% This Year Is Hoarding Cash
(Bloomberg) -- The slump in Chinese equities is no buying opportunity for one of the nation’s top performing fund managers.
“If you buy risk assets now amid this huge market volatility, you’ll easily end up getting buried,” said Lu Jun, founder of private fund Shanghai Congrong Investment Management Co., which manages $1.1 billion in assets.
Lu, a macro fund manager whose flagship product has returned 31% this year as of the end of February, cut most of his stock positions last month and boosted cash levels to above 50%, his highest since late 2015. Instead of equities, he’s been adding long-duration Chinese government bonds since the end of February.
China’s stock market has been more resilient to the volatility upending global asset prices, though the Shanghai Composite Index is close to joining a long list of major indexes globally that have slipped into bear markets. It has lost 19% from an April 2019 high, nearing the 20% threshold that marks bear territory. The nation also faces mounting challenges given its reliance on trade as the pandemic shuts down the global economy.
China’s small-cap ChiNext Index closed down 4.6% on Monday to take its slide from February’s high to more than 20%, marking the entry into a bear market.
In stark contrast to mainland traders’ patriotic buying and belief that China will be shielded from global volatility, Lu -- whose fund name “Congrong” literally means “calm” or “unhurried” -- says he is in no rush to buy on dips as the steeper declines elsewhere have made Chinese stock valuations relatively more expensive. The valuation premium of the S&P 500 over the Shanghai Composite Index has more than halved since early February. He cut most of the fund’s technology and medical stock holdings last month, and bought CSI 500 index futures as a hedge.
Chinese traders pared their stock leverage last week by 2.4%, the biggest reduction since February last year, according to data compiled by Bloomberg.
“The risk was still limited when the epidemic was within China but now it’s become an uncontrollable factor as the virus spreads worldwide, which will inevitably hurt China through the global economic cycle,” said Lu. “The best assets to hold right now are Chinese government bonds and the second best is cash, because everything else is slumping and you get more purchasing power with your cash.”
His fund has beaten 99% of peers this year, according to data from consultancy Shenzhen PaiPaiWang Investment & Management Co. It has returned 529% since its inception in late 2012.
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China’s 10-year government bond yields stood at 2.65% on Monday, which is attractive given yields elsewhere are nearing zero. The nation’s inflation, which remained near the highest since 2011, will likely ease from the end of the second quarter as the effects of high pork prices subside, said Lu, adding the fund will continue to boost bond holdings.
Lu says he is upbeat on the long-term prospects for Chinese stocks once the pandemic shows signs of being contained offshore.
“We’d still want to buy technology and medical shares which represent the future development focus of the Chinese economy, after things settle down,” he said. “Right now it’s best to be patient and wait out the crisis.”
©2020 Bloomberg L.P.
With assistance from Bloomberg