Stock selection in China, portfolio strategy of the best performing fund managers

  • Dara White and Derek Lin are the portfolio managers of the $ 166.6 million Columbia Greater China fund, which has returned 40% year-to-date, beating its benchmark and most of its peers, according to the Morningstar data.
  • Their strong conviction is illustrated by the fund’s two largest positions, Alibaba and Tencent, which represent over 40% of all portfolio assets.
  • In an interview with Business Insider, the co-managers also shared three actions under the radar to play out China’s biotech, electric vehicle and housing story.
  • Visit the Business Insider homepage for more stories.

When it comes to investing in China, Dara White wants investors not to make the headlines.

“I find China is very misunderstood and people tend to focus on politics. When we think about politics, we just try to be very realistic about it,” said White, who manages the Columbia Greater China fund of $ 166.6 million. which brought in 40% this year.

“The reality is that China is a story of much more domestic consumption than it has ever been,” he added.

Co-manager Derek Lin agrees, “A lot of the information flow has been at the macro level, but at the corporate level, what has happened this year is that a lot of companies we invest in are actually better off than they were before. -virus. Their activities actually accelerated during this period. “

Betting on Chinese tech giants

Above all, Lin sees that the acceleration of business in companies like Ali Baba (BABA) and Tencent, which represented approximately 22% and 18% of the fund, respectively.

“They are going to gain shares by coming out of the virus,” he explained. “Small businesses are going to kind of collapse, lose competitiveness, or have cash flow problems.”

Alibaba, which now has a larger market cap than Facebook, is a “no-brainer” for the fund given its moat and position in the industry, according to Lin.

Although known for its e-commerce business, Alibaba has quietly and stealthily built other segments that have yet to be integrated into its inventory, Lin said. It is particularly favorable to its IT activity.

“It’s not a segment that people have focused too much on over the past couple of years because it hasn’t been profitable,” he said. “But if you look at Amazon and what they’ve been able to build with AWS and analysts showing off $ 600 billion to $ 700 billion, etc., that’s a huge opportunity that hasn’t been captured in the course at all. of Alibaba’s stock, in our opinion. “

Even its core retail business has plenty of room for future growth, Lin noted. He pointed out that Alibaba’s current turnout, which refers to the fees companies charge on sales made by third-party vendors, is only 4%. In comparison, Amazon’s participation rate is well over 10%.

“So there is still a huge avenue for them to increase their monetization rate over time,” he said. “Obviously, they add value to traders that will allow them to do it at their own pace. So for us it’s a very exciting long term story and a really decent valuation. “

A similar case can be made of Tencent, which shoots all cylinders.

“With Tencent’s gaming unit it’s a more mature market but it’s still spinning at 20% per year,” he said. “When you factor in eSports, augmented reality and virtual reality, that could turn over the next five years into something even bigger. And these are the best players in the world positioned to do it. “

He continued, “And then you look at the ad, they just got to the fourth ad per day against western peers like Facebook which are well over 20 ads per day, so still a huge lead.”

In the fintech arena, Tencent is already a monster with its digital payment feature built into the Chinese one-stop messaging app WeChat. But it’s Alibaba’s upcoming $ 280 billion IPO, Ant Financial, that shows just how much that segment could grow.

“People don’t value it too much,” Lin said of Tencent’s WeChat Pay. “But when you see Ant Financial talking about a $ 280 billion IPO valuation, it’s still a very exciting place to invest.”

China’s two big tech companies have done well for the fund this year. Alibaba and Tencent have seen their shares increase 46% and 40% respectively since the start of the year.

Three actions under the radar

Beyond the well-known names, the two managers do their utmost to unearth hidden treasures off the beaten track.

They are particularly optimistic about Chinese biotechnology and

health sector
, which has around 10% in the portfolio, doubling the 5% that health represents in the fund’s benchmark.

“In 2013, there was probably less than $ 1 billion invested in healthcare venture capital deals in China, in 2018 it was $ 11 billion,” Lin said. “We’re seeing more and more of these companies coming into the market, so it’s a very exciting time to go fishing in this huge market.”

WuXi organic products is one of the main ways for the duo to play the emerging history of biotechnology. The holding company, whose shares have risen by more than 90% this year, is a contract research organization that helps companies in the industry develop, manufacture and market organic products.

“It’s one way to play it thematically. You don’t have to choose a specific company or product,” White said. “As products move through the pipeline and eventually hit the market, they receive specific payments along the way.”

He added, “They’ve also set up their business model that allows compounds to be brought to market, they will receive a royalty on those products in perpetuity. It’s a great way to play with the industry in its together in a relatively low time. risky manner. “

In trying to identify the best performing companies, the executives are also tapping into the Chinese electric vehicle market.

While Chinese electric vehicle company Nio was in the spotlight last week, Lin and White found a potential winner in Xpeng Engines (XPEV), which went public on the New York Stock Exchange in August.

“The reason we prefer Xpeng today is that they do their own autonomous driving and their own software, so they actually have their entire software-to-hardware stack and they have an operating system,” he said. Lin said. “Whereas Nio worked with Mobileye and had external suppliers.”

He explained, “I think the long term for Xpeng is the ability to monetize the software and become a real long-term subscription business is all the greater. And that’s what really turns us on because you can make a 5% margin on just build the car, but with the software components, which they own entirely, you can double your margins, if not more. “

Another unexpected stock on the team’s radar is Sk Shu painting, a paint products company they recovered in March when COVID-induced volatility weighed on its stock price.

“They’ve left out other local competitors a bit, but they still only have a low single-digit market share, so it’s still a very fragmented landscape,” Lin said of the company.

“There is a path to what you see in global markets where the best players get 30% market share. So it could be 10 or 20 times that over a longer period of time.”


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Don F. Davis

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