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Fund Spy

Top Fund Managers Retreat From China in the Third Quarter

Morningstar Medalist funds largely sold regulation-impacted businesses.

Top-rated fund managers in the third quarter of 2021 trimmed their stakes in companies affected by China's new regulations that took aim at a swath of industries. For some managers, the new regulations were a game changer, with such encroachment and meddling by the Chinese Communist Party making industries or even the entire market uninvestable. For others, the developments reflect the reality of doing business in China, a market that goes through cycles of major regulatory changes every few years but continues to have strong long-term potential, and the recent sell-off represented a buying opportunity. To get a sense of how top fund managers in the aggregate traded the recent news, we looked at third-quarter portfolio changes of all open-end funds with at least one share class with a Morningstar Analyst Rating of Bronze or higher and a reported portfolio as of Sept. 30, 2021.


In February 2021, China issued "Anti-Monopoly Guidelines of the Anti-Monopoly Commission of the State Council on the Platform Economy," which are rules for so-called "platform operators"--essentially e-commerce businesses. The rules curb potential abuse by e-commerce sites by outlawing them from selling items below cost to squeeze out competition, prohibiting them for giving undue preference to certain vendors, and forbidding the platforms from funneling users through affiliated channels or websites, among other restrictions. E-commerce businesses often rely on keeping users within their "ecosystems" to maximize revenue, so laws restricting the extent to which the platforms can nudge its users are a threat to their bottom lines.

Morningstar Medalists sold the large e-commerce companies in response to the new regulations. The collective medalist stake in Alibaba (BABA), the largest Internet retailer in China, was cut by roughly 13% in the third quarter. Managers also tried to guard against delisting concerns by swapping highly liquid U.S.-listed Alibaba ADRs for Hong Kong-listed shares. Medalists dumped nearly a fourth of their aggregate ADR shares while increasing their exposure to the Hong-Kong listed shares by over 30%. Some funds, including Artisan International Value (APHKX), Tweedy, Browne International Value (TBGVX), and T. Rowe Price Global Growth Stock (RGGIX), made pure one-for-one swaps. Overall, 22 medalist funds completely liquidated their stakes in Alibaba, while no medalists started new positions in the company. The new positions in the Hong Kong shares were either ADR swappers or funds that already owned Alibaba through the ADR. 

Meituan, China's second-largest e-commerce platform, experienced a similar retreat. Medalists dumped over 20% of their shares in the company, led by Invesco Developing Markets (ODVYX) and American Funds EuroPacific Growth (AEPGX). There were, however, a handful of strategies that saw a buying opportunity in Meituan, including Fidelity OTC (FOCPX) and Fidelity Advisor Focused Emerging Markets (FIMKX), which both started new positions in the company, plowing more than $250 million in the stock. Medalists added to their aggregate interest in, the third-largest online retailer in China, by over 10%. However, the bulk of the new shares came from a single fund--Dodge & Cox International Stock (DODFX)--which upped its stake by over 50%. Outside of that one fund, there was a net reduction, with four medalists liquidating their positions. 

With regulations aimed at the largest players, smaller e-commerce platforms attracted money. For example, Vipshop (VIPS), an online discount retailer, attracted five new buyers, including Oakmark International (OAKIX), MFS Emerging Markets Equity (MEMIX), and MFS International New Discovery (MWNIX), and the overall medalist interest in the company increased nearly 400%.

Social Media

Issued in August 2021, the "Personal Information Protection Law of the People's Republic of China" took aim at social-media companies. This law requires companies to receive consumer consent via a "voluntary and explicit statement" before handling personal information, though it allows for plenty of circumstances where consent is not needed--namely, the collection of data for "public interest." Social-media companies derive most of their revenue from targeted ad sales based on the user data it collects, so any regulation that limits the amount or types of data they can collect presents risk to their businesses.

Tencent, a sprawling technological behemoth involved in social media, video games, and payments, experienced the largest sell-off of all Chinese companies in the third quarter, at least in terms of total estimated dollars. Medalists sold an estimated net $4 billion in their collective position, or more than a 20% drop in shares owned. Fifteen medalist funds liquidated their stakes in the company, including Invesco Oppenheimer International Growth (OIGIX) and Fidelity Advisor International Capital Appreciation (FCPIX), which both sold their more than $200 million interests in the company. Still, a handful of managers took the falling share price as a buying opportunity. Harding Loevner International Equity (HLMIX) increased its stake by more than 60%, while American Funds Growth Fund of America (AGTHX) upped its shares by over a third.

Medalist funds shaved nearly 90% of their combined investment in Kuaishou Technology, the creator of SnackVideo, a short-form video platform that competes with TikTok. The company was controversial before the regulatory changes; India banned SnackVideo in 2020 because of what it deemed to be national security concerns. Of the eight medalist funds that held the stock at the beginning of the quarter, five completely liquidated their stakes, including American Funds EuroPacific Growth and Invesco Developing Markets. A handful of Fidelity funds upped their shares of the company, though. Fidelity Growth Company (FDGRX) and Fidelity Emerging Asia (FSEAX) each more than tripled their shares, while Fidelity Blue Chip Growth (FBGRX) initiated a new position in the firm. The hits kept coming for Kuaishou after quarter-end as well; in October 2021, Su Hua, the company's founder, stepped down from his post as CEO.


Finally, in July 2021, China issued "Opinions on Further Reducing the Work Burden of Students in Compulsory Education and the Burden of Off-Campus Training," which was directed at education companies. While the law is written in a spirit of limiting homework time for students, it is a reassertion of state control over education. The law turned private education companies into nonprofits overnight while bolstering after-school tutoring services in state-run schools and outlawing "overseas education courses."

Not surprisingly, medalist funds flew toward the exits upon the news. As of September 2021, medalists sold 95% of their overall exposure to TAL Education Group (TAL), led by Invesco Developing Markets liquidating its $180 million stake and T. Rowe Price Emerging Markets Stock (PRZIX) selling its more than $30 million position in the company. New Oriental Education & Technology (EDU) saw a similar flurry of exits. Of the 18 funds that held either the ADR or Hong Kong-listed shares to start the quarter, 15 completely liquidated their shares by quarter-end. Invesco Developing Markets was one of the holdouts. It went into the quarter with the largest stake--over 45 million shares--and it did not sell a single one by Sept. 30. The value of its position dropped from $375 million to $94 million, a nearly 75% decrease. Aside from that fund, the aggregate interest in New Oriental fell by almost 80%.

Jack Shannon does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.