The Shenzhen-based fund manager has run the Bosera Value Mixed Fund since February 2015. This fund, together with one bond fund and one equity fund, are expected to start sales in Hong Kong in June 1 via the Mutual Recognition of Funds scheme.
The value mixed fund was set up in 2008 and currently has RMB 362.5m ($55.3m) of assets under management.
Financials account for 31% of the fund’s sector holdings and also the highest, which are mostly banks, but there are also insurers, he said.
The banking sector has always remained the key holding of the fund, he said in a briefing on Friday. “The banks have low valuations during a slow growth period, while offering strong returns when they are growing.”
Loan concerns manageable?
The price-earnings ratio of mainland banks are on average about five times. The price-to-book ratio is than 1x, which are at very low level, Huang said.
Valuations are low for a reason. Many investors see China’s banks as risky due to lack of transparency concerning the amount of debt they are holding, and the extent to which they can withstand loan defaults, which have been on the rise in China.
Huang, however, shakes off worries on the rise in bad debts held by mainland lenders. The sour loans problem used to be a serious concern 10 years ago, he said, but then the banks have under implemented structural changes and are gradually de-risking.
The rising bad debt ratio is a “small turning point” but it is normal and controllable, he noted.
Citing reports, he said the worst estimation is that banks have about 10-15% of bad debts.
Even if all bad debts turn into actual losses, they would account for 30-50% of the banks’ net assets, according to Bosera’s own calculations. Huang said under such extreme situations, the banks can make it through, as they only have about 0.8-0.9x of price-to-book ratio. A bank can earn back the losses in two years’ time, he said.
Meanwhile, about 70% of bank loans are backed by collateral, while the remaining 30% are usually big clients who can manage to repay loans, he believes.
Although the banking sector has underperformed relative to small-cap growth companies, he said the revenue and earnings visibility of small technology companies is too short with too many uncertainties to manage.
Portfolio trimming
The fund has very little exposure at health care and tech sectors at 6.6% only amid high valuations. Large-caps holdings are always kept at above 50% of the portfolio, he added.
Huang said he always kept the equity holdings above 90% in the past, and was only lowered between February to March this year. “The quant model indicated that the large uptrend in the past three years was over, so we cut our equity exposure in February and March when there was a market rebound.”
Equity allocation reached back to above 80% at the moment, as compared to 70% at the end of March, Huang said. He added some value large-caps when the market fell the past two months.
A point to note is that the fund is using a quantitative approach, thus turnover rate is very high at between 5-10 times a year.
