Tencent's Giant Rally Is a Problem for Some China Investors

Updated on
  • A ‘real headache’ if Tencent continues surge: UBS’s Shi Bin
  • Allocations are restricted to 10 percent for a single stock

A pedestrian walks past headquarters in Shenzhen, China.

Photographer: Qilai Shen/Bloomberg

When it comes to China’s biggest technology stocks, some investors are finding there can be too much of a good thing.

Take Shi Bin, a portfolio manager at UBS Asset Management (Hong Kong) Ltd. One of the top stocks in his UBS (Lux) China Opportunity equity fund is Tencent Holdings Ltd., which has soared 70 percent this year. So far, so good. But it’s hard competing with the likes of the MSCI China Index because he is hobbled by regulations that restrict funds’ allocation in any single stock to 10 percent. Tencent’s MSCI China weighting is 16.3 percent.

“We were lucky to have beat the index,” Hong Kong-based Shi said in an interview during a visit to Taipei. “It would be a real headache for us if Tencent shares continue to surge, as it’ll be difficult to find better bets.”

Shi has almost maxed out on his Tencent allocation, which had a 9.9 percent weighting in his fund as of the end of July. He’s also heavy on fellow Internet giant Alibaba Group Holding Ltd, with a 9.6 percent allocation. The two companies have been the biggest drivers of the MSCI China Index’s 40 percent rally this year: Alibaba’s stock price has nearly doubled. Tencent gained as much as 1.1 percent in Hong Kong on Friday before trimming to close up 0.4 percent.

Shi’s China Opportunity fund, which has total assets of $2.2 billion, has returned 43 percent this year. His top 10 holdings also include Internet companies Baidu Inc. -- whose American Depository Receipts have risen 42 percent -- and NetEase Inc., which has gained 28 percent. The standout performer is TAL Education Group, which has the biggest allocation. The after-school tutoring provider’s U.S.-traded shares have soared 173 percent in 2017.

Frank Tsui, a fund manager with Value Partners Hong Kong Ltd., said he’s been hearing more complaints about the 10 percent limit as Tencent and Alibaba climb. “Managers with an objective to outperform a benchmark index while having to mind the tracking error would feel a bit more pressure,” he said.

Tsui expects the cap to remain for the next decade at least. Eric Lin, whose Eastspring Investments China Fund has returned 20 percent this year, said it should encourage diversification. “It’s a fund manager’s responsibility to not put all eggs in one basket, and we’ll find more quality companies like Tencent and Alibaba,” he said.

The 10 percent rule was established as part of a code of conduct, with the China Securities Regulatory Commission saying fund managers should adopt a “scientific and reasonable” strategy and risk controls when investing in equities.

“I hope this limit will be scrapped,” said Bruce Hsu, whose Allianz Global Investors China Strategic Growth Fund lags MSCI China with an 18 percent gain this year. “It is enacted purely because the financial markets are not mature enough. Asian markets will need to draw closer to developed markets sooner or later.”

— With assistance by Cindy Wang, and Amanda Wang

(Updates Tencent move in fourth paragraph.)
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