HONG KONG (Bloomberg) - One of Yang Yong's stock funds surged 304 per cent in a year by investing in a handful of China's largest companies - and he says that's a sign of how far the market has come.
The Yu Shan Xun Niu No 1 fund has posted one of the best performances in China's US$1.6 trillion private fund market by buying shares of no more than 10 industry giants.
It hit the jackpot by holding Hong Kong-listed developers Sunac China Holdings and China Evergrande Group, Asia's hottest stocks in the last 12 months, while also racking up gains on consumer shares such as China's largest distiller, Kweichow Moutai Co.
To Yang, China has become a prime market for investing in quality consumer-focused companies capable of delivering sustainable earnings over long periods.
The Warren Buffett fan says the market's steady rally this year, propelled by its largest stocks, attests to how it has evolved since its notorious boom-and-bust cycle in 2015.
"The gains now are rational," said the 37-year-old founder of Shenzhen Qianhai Yunxi Fund Management Co, which manages about 700 million yuan (S$143 million).
"The market is becoming more like a rational market like the US."
Chinese shares from the mainland and Hong Kong to the US have advanced this year amid strong earnings and economic data.
But performance has diverged, with a gauge of small caps trading near the lowest versus a measure of large caps since 2015.
Yang used Kweichow Moutai and Jiangsu Hengrui Medicine Co, the country's biggest drugmaker by market value, to illustrate his preference for large-cap, consumer-focused shares.
Both have jumped more than 78 per cent in the past year. (Some investors say the surge in consumer and other defensive stocks is evidence of the caution that pervades China's equity markets these days.)
But a bigger factor in Yang's success was the unparalleled performance of Sunac and China Evergrande, which both surged at least 465 per cent in the past 12 months, the best returns on the MSCI Asia Pacific Index.
If those gains don't look quite as rational, Yang points out that his investment thesis was solid: he bought them betting that lower valuations in Hong Kong would attract Chinese inflows.
China Evergrande fell 4.2 per cent, the most in more than a month, in Hong Kong on Tuesday, while Sunac slid 5.1 per cent. Kweichow Moutai slipped 1.3 per cent in Shanghai, and Jiangsu Hengrui lost 3.4 per cent, with analysts pointing to funds taking profit on consumer stocks after large gains this year.
Yang acknowledges that many of the shares that he holds - and he's reluctant to identify some of them - are no longer cheap, but says the country's equities will extend their slow bull run at least until the first half of 2018.
Limits on other asset classes, such as steps to cool the property market, will drive money into shares, he said.
"If these stocks don't do well, others won't either," Yang said, when questioned about the risk of having so much of his holdings concentrated in a few sectors.
"Would you ask Buffett if he's worried consumer stocks won't rise?" (He mentioned the US billionaire six times in half an hour.)
Yang is one of the leading lights - at least over the past year - in a corner of China's market called private funds, which are open only to institutions and wealthy individuals, those deemed sophisticated enough to invest in products governed by looser rules.
His fund's 304 per cent gain over the 12 months through Oct 31 is the second-best performance among 4,290 private funds with similar strategies tracked by Shenzhen PaiPaiWang Investment & Management Co, which provides data on the industry.
Investors in private funds have to put in at least one million yuan and have at least 10 million yuan of net assets.
Private funds have no concentration limits, unlike mutual funds that can't have more than 10 per cent of assets in any one stock. And private funds have looser disclosure requirements, and more freedom to trade derivatives.
More than half of China's private funds invest in private equity, while 16 per cent, including Yang's company, trade public securities, official data show.
As economic growth slows, the country's larger companies will outperform, making it more attractive to buy funds investing in listed stocks, said Zeng Ninghua, director of research at wealth-management service provider Howbuy.com.
Yang's fund is succeeding as some things shift in favour of buy-and-hold investing.
Memories of the 2015 crash have put retail investors off speculation, leverage has fallen, and reduced corporate restructuring has made betting on such activities less lucrative. Chinese officials are also increasingly stressing the need for markets to serve the real economy.
In fact, the Hunan native's own career has mirrored the changes in the country's stock market.
Encouraged by his investment record since he was 20, and as markets were bottoming out after the global financial crisis, he quit his job as a manager at China National Accord Medicines Corp and became a full-time investor in 2010.
In 2014, he started his own company, where he provided credit to investors for stock trading, but he had to close the business just a year later as regulators cracked down on leverage during the market crash.
Last year, he got a private-fund license and started to focus exclusively on equity investment.
Howbuy's Zeng, however, sounds a note of caution about outsized gains.
While one fund may do well in a given year, private funds on average don't outperform mutual funds, he says.
And those with staggering returns tend to rely on leverage - which Yang says he doesn't use - or concentration.
But Yang himself is unperturbed.
He says he's tapping a consumer stock boom that's set to last for the duration.
And like his US investing idol, he says all he needs to do is have courage in his convictions.
"In the stock market, you just have to stick to a theory - the right theory - and you can make a lot of money," he said.