Changpeng Wan
A significant reallocation is underway within China’s investment funds, creating ripple effects across healthcare and technology sectors. Fund managers who rode the innovative drug wave to spectacular gains are now pivoting toward AI-driven medical companies, betting on the next major growth narrative. This strategic shift from proven performers to emerging disruptors represents one of 2025’s most consequential investment trends. The movement of billions in institutional capital signals a fundamental reassessment of where the smart money believes the greatest medical innovation returns will emerge in the coming years.
The Profitable Exit: Why Funds Are Cashing Out of Biotech
Fund managers have enjoyed extraordinary returns from innovative drug companies throughout early 2025. By August 17th, top-performing healthcare theme funds had delivered staggering returns approaching 150% year-to-date, with much of these gains concentrated in pharmaceutical holdings. This exceptional performance created both opportunity and necessity for portfolio managers seeking to lock in profits and redeploy capital toward the next growth story.
Record Returns Trigger Natural Profit-Taking
The concentrated success in biotech created a crowded trade situation. As more institutional money flowed into innovative drug companies, fund managers began looking for exit opportunities to realize gains. The simultaneous doubling of multiple innovative drug theme funds in June and July created a natural inflection point for portfolio rebalancing. This profit-taking activity wasn’t driven by negative sentiment toward biotech but rather by the mathematical reality of position sizing after such dramatic appreciation. Several prominent funds demonstrated extreme concentration in drug companies. Harvest Fund’s Hong Kong Advantage Fund held前十 stocks exclusively from pharmaceutical companies including Duality Biologics, Kelun-Biotech, 3SBio, and CSPC Pharmaceutical Group. Similarly, Great Wall Medicine Industry Select Fund and E Fund Global Healthcare Industry Fund maintained portfolios heavily weighted toward drug stocks. This focused strategy delivered exceptional returns but also created concentration risk that managers sought to address through diversification.
The AI Healthcare Landscape: Understanding the New Frontier
While innovative drugs represent mature technologies with proven commercial pathways, AI healthcare occupies a earlier developmental stage with different risk-reward characteristics. Fund managers recognize these technologies operate on different timelines and require distinct investment approaches.
Contrasting Development Cycles and Investment Profiles
Innovative drugs have reached a stage of concentrated results delivery, with clear breakthroughs evident from clinical data to pipeline implementation. This maturity provides clearer visibility into near-term revenue potential and earnings explosions. In contrast, AI medical companies remain primarily in product validation and commercial model exploration phases. As Liang Furui, portfolio manager of Great Wall Medicine Industry Select Fund, explained: ‘Innovative drugs and AI medical are essentially at different development stages. Current innovative drugs have entered a period of concentrated results delivery, showing clear breakthrough trends from clinical data to pipeline landing. This certainty provides a clearer anchor for performance explosion. AI medical is currently more in the early stage of product validation and business model exploration.’ This developmental difference creates complementary investment opportunities rather than direct competition. The ‘drugs first, tech second’ approach allows funds to capture proven returns before transitioning to emerging opportunities.
The Rotation in Action: Tracking the Major Moves
The transition from biotech to AI healthcare has manifested clearly in fund holdings data throughout mid-2025. Major institutions have been systematically reducing drug exposures while establishing positions in AI medical companies.
Notable Portfolio Changes Among Leading Funds
By the end of June, clear patterns emerged across multiple fund families. Yinfa Medical Health Fund listed AI medical company Xtalpi as its largest holding at over 8% of portfolio weight. This position proved prescient as Xtalpi’s stock price surged nearly 65% during the first two weeks of August. Other major institutions including China Asset Management, China Merchants Fund, and Fullgoal Fund began establishing positions in AI medical stocks like Xtalpi, iFlytek Times Angel, Medical Technology, and Unisound. These companies increasingly appeared in top holding lists as fund managers allocated meaningful capital toward the emerging sector. The rotation involved both adding new positions and funding them through reductions elsewhere. Wanja Health Industry Fund sold Kelun-Biotech Biological, previously its largest holding, and removed it from top holdings alongside WuXi AppTec. These reductions made room for new positions in iFlytek Medical Technology and Xtalpi, which became the fund’s fifth and sixth largest holdings respectively. Similar moves occurred at Qianhai Source Fund, China Asset Management, and Huisheng Fund, with companies like BeiGene, Innovent Biologics, and Hansoh Pharmaceutical exiting top holding lists while AI medical companies like Times Angel and Jiuan Medical entered them.
Valuation Dynamics: Pricing Tomorrow’s Potential Today
The AI healthcare sector commands premium valuations despite early-stage commercial development, reflecting investor expectations for future growth. Fund managers appear willing to extend valuation tolerance for what they perceive as transformative technologies.
The Valuation Gap Between Established and Emerging Technologies
Significant valuation disparities have emerged between mature drug companies and emerging AI medical players. Everest Medicines, an AI medical company heavily held by Ping An Fund, generated approximately RMB 700 million in 2024 revenue but achieved a market valuation approaching HK$30 billion. This valuation represents a significant multiple expansion compared to traditional pharmaceutical companies with similar revenues. Similarly, Unisound, with approximately RMB 900 million in 2024 revenue, saw its market capitalization exceed HK$50 billion during July-August as its stock price experienced sustained increases. These valuations reflect investor willingness to price future potential rather than current financial performance. Fund managers are essentially making bets on which companies will dominate emerging categories rather than which demonstrate current profitability. This valuation approach resembles earlier technology investment cycles where future market leadership commanded premium multiples during formative industry phases.
Market Performance: AI Healthcare Gains Momentum
The transition toward AI healthcare investments has coincided with impressive market performance throughout the third quarter of 2025. As innovation drug funds achieved their doubling milestones, AI medical companies began attracting increased attention and capital.
Accelerating Market Recognition and Performance
August witnessed notably increased activity across AI medical stocks, with some displaying momentum that appeared to challenge innovation drug companies’ market leadership. Tempus AI, a global AI medical giant covered by China Universal Fund’s QDII products, experienced strong upward movement with gains exceeding 30% within a two-week period. This performance occurred despite AI healthcare’s previously weaker showing during the first half of 2025. As Long Yufei, manager of Great Wall Jiujia Innovation Growth Fund, noted: ‘The AI medical related sector performed relatively weakly in the first half of this year. AI medical’s market recognition and attention temporarily lagged behind innovative drugs.’ The combination of healthcare and technology attributes within AI medical companies creates a unique investment profile. However, this hybrid nature hadn’t previously demonstrated clear correlation with broader healthcare sector movements until recent months. The anticipated catch-up行情 for AI healthcare appears increasingly probable as institutional capital seeks opportunities in relatively undervalued segments with transformative potential. Companies showing signs of bottoming performance may particularly benefit from capital rotating from highly appreciated positions elsewhere.
Investment Thesis: Why Fund Managers Are Making the Switch
The movement toward AI healthcare reflects sophisticated investment theses being developed by China’s top portfolio managers. These professionals see compelling reasons to reallocate capital despite innovation drugs’ strong performance.
The ‘Pick and Shovel’ Logic of AI Plus Drug Discovery
Fund managers recognize distinct value propositions within different AI healthcare applications. AI-plus-drug discovery essentially follows a ‘pick and shovel’ approach – providing the tools rather than conducting the mining itself. This strategy offers diversified exposure to multiple drug development efforts rather than concentration in specific therapeutic outcomes. In contrast, AI-plus-medical focuses on monetizing diagnostic data through solutions that reduce costs and improve efficiency across healthcare delivery. This approach potentially creates recurring revenue models based on healthcare system integration rather than one-time product sales. As Hua’an Medicine Biological Fund manager Sang Xiangyu articulated: ‘AI medical is expected to become 2025’s annual investment theme. AI+ drug discovery mainly follows the ‘tools seller’ logic, while AI+ medical realizes value through diagnostic data monetization, achieving cost reduction, efficiency improvement, and business logic enhancement, empowering all aspects of medical care.’ The collaboration model between ‘internet giants + pharmaceutical companies + top hospitals’ appears particularly promising from a competitive advantage perspective. This approach leverages high-quality data from institutional partners to develop superior models before expanding toward consumer applications. Companies with valuable data assets or partnerships with high-level hospitals for department co-construction and data access represent particularly attractive investment targets according to this thesis.
Strategic Implications for Investors
The institutional rotation from innovation drugs to AI healthcare carries significant implications for various market participants. Understanding these shifts helps inform smarter investment decisions across market caps and sectors.
Navigating the Transition as an Individual Investor
For individual investors, the massive reallocation underway creates both opportunities and challenges. The concentration of institutional selling in certain innovation drug stocks may create temporary price dislocations that alert investors can exploit. Simultaneously, the substantial institutional buying in AI medical names may create momentum opportunities but also valuation risks if positions become overcrowded. The optimal approach may involve understanding which specific companies possess sustainable competitive advantages rather than simply following the sector rotation. Companies with proprietary datasets, established hospital partnerships, and proven technology implementations likely offer better risk-adjusted returns than those simply benefiting from sector momentum. Investors should also consider that early-stage technologies typically experience volatility as commercial validation occurs. Position sizing should reflect the higher uncertainty associated with emerging technologies compared to established pharmaceutical companies with commercialized products and revenue streams. As always, diversification across sub-sectors and market caps provides protection against being overly exposed to any single investment theme, no matter how compelling the narrative appears. The dramatic repositioning occurring within professional investment portfolios represents a sophisticated response to changing market conditions and opportunity sets. While following smart money can be profitable, blind imitation without understanding underlying investment theses often leads to suboptimal outcomes. The most successful investors will likely be those who understand why this rotation is occurring rather than simply that it is happening. As fund managers reduce innovative drug holdings while adding AI medical positions, they’re not abandoning healthcare innovation but rather repositioning along the development curve to capture the next wave of value creation. This movement represents professional capital allocation at work – taking profits from successful investments and redeploying toward emerging opportunities with attractive risk-reward characteristics. For investors considering their own positioning, the key question becomes: which companies possess the technology, data, and business models to actually transform healthcare delivery rather than simply benefiting from temporary investment theme popularity? The answers will likely determine investment success far more than simply tracking which sectors funds are currently buying or selling.
