Major correction of tech stocks in July: Which funds are paying the price for chasing high overvalued positions?

Some active equity funds that concentrated on position adjustment in the second quarter lost all their previous gains in just one month. The net value of some newly issued funds that built positions at high levels even suffered a "halving", quickly falling below the 0.6 yuan mark...

The active public offering funds that made large-scale position adjustments to deploy in the technology track in the second quarter faced a painful moment in July when technology stocks plunged.

In the second quarter, the high-dividend and large consumer sectors of the A-share market were continuously sold off, and massive capital poured into the technology tracks dominated by artificial intelligence (AI) and semiconductors. According to the calculation data of CITIC Securities, the position proportion of active public offering funds in the electronic industry reached a historical high of 42.64% at the end of the second quarter.

However, since July, along with the volatility of global chip stocks and the deep correction of the A-share technology sector, as of the close on July 30, the ChiNext Index fell by 25.29% in July, the Science and Technology Innovation 50 Index fell by 28.06% within the month, and the Science and Technology Innovation Composite Index fell by more than 30% in the same period. Those funds that "got on the bus" at the high point of the technology sector in June encountered a staged net value "trial". Many veterans who once stuck to value investment suffered a sharp drawdown in the net value of the funds they managed due to chasing high technology stocks. Some active equity funds that concentrated on position adjustment in the second quarter lost all their previous gains in just one month. The net value of some newly issued funds that built positions at high levels even suffered a "halving", quickly falling below the 0.6 yuan mark...

Value Veterans "Chasing Tech"

If the second-quarter fund reports are pieced together, a fanatic picture of public offering institutions going "All in" on technology growth will come to life on paper.

What attracts the most market attention is the position adjustment of several "consumer believers" whose management scale once reached the hundred-billion level. The data of the second quarterly report shows that E Fund Blue Chip Select, managed by star fund manager Zhang Kun, significantly reduced its holdings of liquor stocks regarded as the "ballast stone" in the second quarter, with the reduction rates of Kweichow Moutai, Luzhou Laojiao, and Wuliangye reaching 47%, 52% and 71% respectively. Correspondingly, SMIC and Dongshan Precision have for the first time ranked among the top ten heavyweight stocks of this fund.

Similar scenarios also happened to star fund manager Liu Yanchun of Invesco Great Wall and star fund manager Zhu Shaoxing of Wells Fargo Fund. In the second quarter, Invesco Great Wall Dingyi, co-managed by Liu Yanchun and Ke Haidong, completely replaced all of its top ten heavyweight stocks, liquidating all consumer stocks and pharmaceutical stocks, and replacing them with semiconductor and computing power targets such as Jiangfeng Electronics and Zhongji Xuchuang. In the second quarter, Wells Fargo Tianhui Growth managed by Zhu Shaoxing removed Kweichow Moutai, which it had held for six years, from its top ten heavyweight stocks, and added Zhongji Xuchuang.

"This phenomenon is rare in history. When firm value investors give up their persistence, it often means that the sentiment of a single sector has reached the extreme." A senior chief strategist from a securities firm told the Economic Observer reporter, "A position proportion of more than 40% in the electronic industry easily reminds people of the new energy in 2021 and the Internet+ in 2015. The excessively crowded trading structure itself is the biggest risk."

The data further confirms this extreme position adjustment of equity public offering funds. According to Wind statistics, a total of 67 active equity funds significantly increased their TMT (Technology, Media and Telecommunications) positions in the second quarter. The average weight of these funds holding the TMT sector in the first quarter was only 6.75%, which soared to 54.99% by the end of the second quarter. If the statistical caliber is relaxed, the number of active equity funds that significantly increased their allocation of technology stocks in the second quarter is close to 300.

The Cost of Chasing Highs

The accelerated peak rush of technology stocks in June made many fund managers who entered the market in a hurry during this period stand precisely at the top of the mountain.

Entering July, the technology sector fell collectively, with the AI industry chain and semiconductor individual stocks that had huge gains in the previous period bearing the brunt. Those active equity funds that abandoned their original diversified positions in the second quarter and concentrated on embracing technology quickly encountered a fierce net value backlash. All funds that significantly increased their positions in TMT turned down in July, with an average decline of more than 20%, among which 12 funds fell by more than 40%.

Jinxin High-Quality Growth, managed by fund manager Tan Zhimi, completely replaced its top ten heavyweight stocks dominated by the medical sector in the first quarter with technology stocks such as Hygon Information and SMIC in the second quarter, and the TMT weight soared from zero to 72.35% of the fund's net value. As a result, the net value of this fund fell sharply in July, not only erasing the gains of June, but as of July 30, the decline for the month reached 26.34%.

Guoshou Anbao Wenhui, managed by fund manager Yan Yang, increased the TMT weight to 81.46% of the fund's net value, and then the net value of this fund plummeted by nearly 40% in July.

What is even more astonishing to investors is the operational distortion of some funds amid the plunge of technology stocks. Take the Yinhua Fertile Select 3-Year Holding Period Hybrid as an example. Its fund manager Jiao Wei was previously known for preferring dividend assets and consumer stocks, but he significantly adjusted positions to semiconductors and AI computing power supply chains in the second quarter. After the continuous plunge of technology stocks in mid-July led to a significant shrinkage of net value, the daily net value performance of this fund began to show a significant negative correlation with the technology stock market, which was questioned by the market as "cutting meat at the bottom". As of July 30, the fund fell by 10.63% within the month.

In addition, the phenomenon of style drift is also common in this technology carnival. Seven of the top ten heavyweight stocks in the second quarterly report of the CCB High Dividend Theme Fund are targets related to semiconductors and optical modules, including high P/E ratio technology enterprises such as Zhongji Xuchuang (position proportion up to 9.24%), Eoptolink, and Core Micro, which are seriously inconsistent with the "high dividend" in the fund name. This has aroused extensive discussions among netizens in the discussion area of third-party consignment platforms.

This kind of behavior of "hanging a sheep's head and selling dog meat" deviates from the product positioning and breaks investors' asset allocation expectations based on the "high dividend" label, which also needs to be questioned.

The Dilemma of "Half-Price" New Funds

Apart from a few old funds struggling in position adjustment, newly issued funds are not spared. Even new funds face a more tragic situation because they built positions in technology stocks at high levels.

Guotai Haitong New Energy Select Hybrid Initiation A, established on June 16, is a newly issued product focusing on new energy and related pan-technology tracks. The fund was launched at a face value of 1 yuan, but in less than two months after its establishment, its net value slid rapidly. As of July 30, its unit net value has fallen to 0.5509 yuan, with a yield of -44.91% since its establishment, ranking almost at the bottom among 5417 similar products.

Similarly, Rongtong New Materials A, established on June 2, also faces similar problems. The fund focuses on upstream AI materials, and looks for investment opportunities in raw material price increases caused by supply-demand mismatch under the demand transmission path of AI capital expenditure → AI computing power hardware → upstream raw materials.

However, with the recent sharp drop of technology stocks, the net value of this fund has also encountered a Waterloo. As of July 30, the unit net value of Rongtong New Materials A is 0.6020 yuan, and the yield since its establishment is -39.80%.

The reason is that the two funds mentioned above encountered the staged high point of the relevant tracks during the position building period in June, and did not take effective risk control measures after entering July, thus being damaged by the deep correction of the sector.

"New funds have no historical safety cushion. Once they build positions at the high market level and encounter extreme market conditions, the risk will be amplified." A person from the product department of a large public offering fund in South China confessed to reporters, "Many times, the issuance of new funds caters to the current market hotspots, and the time when they sell well is often the end of the market rally."

On July 31, along with the sharp rebound and surge of the technology-related sectors in the US stock market, the A-share technology sector also opened sharply higher and then moved downward. As of the close, the ChiNext Index rose by 3.06%, and the Science and Technology Innovation Composite Index rose by 3.69%. Multi-modal AI concept stocks and the computing power hardware industry chain rebounded sharply, with nearly 4,700 individual stocks rising across the market.

Market fluctuations never stop. These funds that chased high technology are waiting for the market test in a longer cycle.

This article is from the WeChat official account "Economic Observer", authors: Hong Xiaotang, Zhang Pengrui, published with authorization from 36Kr.