Winston Ke, FSSA
Against the backdrop of Warren Buffett’s Berkshire Hathaway cutting its stake in BYD, a Chinese electric vehicles (EV) manufacturer, FSSA Investment Managers has been one of the few investors that has questioned the merits of investing in the sector.
Shares in BYD plunged after the famed investor began cutting his stake in the EV company, cashing in around $600m of stock, making a roughly 35-fold profit on his original investment. Buffett still holds 207m shares in BYD.
However, many analysts attributed the sale to the billionaire’s focus on intrinsic value rather than anything wrong with the stock per se. Overall, the EV sector has witnessed robust growth, with China accounting for 61% of the global EV market, and penetration nearly doubling in the past year.
Still, FSSA joined Buffett by drawing attention to valuations in the sector.
“After some consideration, we think valuations appear stretched, indicating high expectations on both profitability and volume,” said Winston Ke, portfolio manager at FSSA Investment Managers.
“The sector is evolving quickly with competition increasing while visibility remains low.”
Ke also believes it is difficult to predict the long-term winners for the sector given the fast evolution among carmakers and battery companies.
“When the market is fixated on a particular theme, what we call a thematic market, we believe it is best to be cautious and avoid the herd mentality. Sometimes that means missing out on the stocks that have performed well, but are yet to prove themselves as long-term earnings compounders,” he added.
Many other investors have taken a different view. For example, BNY Mellon is positive on electric vehicles.
During an interview with FSA, Robert Zeuthen, fund manager of BNY Mellon Mobility Innovation Fund, said he believed the sector will be further boosted by the adaptation of EVs globally, product innovation and government efforts to drive sustainability.
Government regulations such as clean air policies, energy security goals and cost of ownership are going to boost the growth of the sector in the next decade even as global growth slows, said Zeuthen.
Meanwhile, Ke also said that FSSA does not own companies with direct exposure to coal or oil production despite energy stocks being the only sector in the China MSCI index to post a positive return year-to-date.
“We see many reasons for not owning such companies. Our process focuses first on quality, and it can be difficult to find suitable long-term investments in the energy sector,” said Winston Ke, portfolio manager, FSSA Investment Managers.
“Commodities-driven companies tend to be cyclical and lack pricing power. We are also concerned about their demand potential in the long run given environmental concerns.”