Top Fund Is Cautious on China Property Stocks Amid Cooling Steps

A top-performing fund is cautious on Chinese property stocks after rallies drove up valuations and local governments took measures to curb gains in the real estate market.

Robert Lloyd, whose $364 million JPMorgan Pacific Securities Fund has beaten 97 percent of peers over the past year with a 16 percent return, says he is underweight property shares and owns only one Chinese real estate company.

"We are very cautious on China, in terms of recent property tightening measures initiated by regional governments,” said Lloyd, whose fund has outperformed all other Hong Kong-domiciled funds under a mutual recognition program with China. “The real estate sector is generally fully valued.”

In recent weeks Chinese authorities in at least 21 cities have introduced home-buying curbs, ranging from raising down-payments for first and second homes, to ruling some potential buyers ineligible. China’s financial regulators also plan to further tighten control on funds flowing into the property market in violation of current rules, according to people familiar with the matter. The nation’s home prices surged by the most in six years in August.

Investor sentiment has turned against Chinese real estate companies amid growing concern of a bubble. China Resources Land Ltd. is the second-worst performing company on Hong Kong’s Hang Seng Index in the past month, while China Overseas Land & Investment Ltd. has slumped more than 5 percent. The two companies rallied earlier in the year amid speculation surging home prices would boost their earnings outlook.

Lloyd said he likes Chinese Internet companies amid prospects of higher advertising revenues and because rapid earnings growth makes valuations cheaper. He didn’t name any specific stock. His fund’s top holdings included Tencent Holdings Ltd., AIA Group Ltd. and Orix Corp. at the end of September, according to JPMorgan Asset Management.

— With assistance by Amy Li, Amanda Wang, and Shidong Zhang

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