Eliza Wong
Exceptional Performance in China’s Tech-Driven Fund Landscape
The second half of 2023 has witnessed remarkable outperformance in China’s equity fund space, with two funds achieving the rare distinction of doubling their value since July. This exceptional performance comes amid accelerated momentum in technology sectors, particularly artificial intelligence hardware, capturing the attention of institutional investors worldwide.
These doubling funds have demonstrated the potent combination of strategic positioning and timely execution in China’s rapidly evolving market. The performance highlights how fund managers are navigating the complex intersection of technological innovation, global supply chain dynamics, and domestic market conditions to generate exceptional returns.
Key Performance Metrics
– Chang’an Xinrui Technology Pioneer 6-month Fixed Open Fund: 101.49% return since July 1
– Yongying Technology Intelligent Selection Fund: 101.13% return since July 1
– Nine additional funds achieving returns exceeding 90% in the same period
– Significant outperformance compared to broader CSI 300 Index returns
The CPO Revolution Driving Fund Performance
The extraordinary performance of these doubling funds finds its roots in the explosive growth of co-packaged optics (CPO) technology stocks, particularly the market leaders known colloquially as the ‘Yi Zhong Tian’ trio. This refers to Xin Yisheng (新易盛), Zhongji Innolight (中际旭创), and TFC Optical Communication (天孚通信), which have become the cornerstone holdings for top-performing funds.
These photonics companies have experienced staggering individual performance, with Xin Yisheng gaining 175%, Zhongji Innolight rising 189%, and TFC Optical Communication advancing 136% since July 1. The concentrated exposure to these high-flying stocks has been the primary driver behind the doubling funds phenomenon.
Market Dynamics and Growth Catalysts
According to Yongying Fund analysis, several structural factors are driving the CPO sector’s outperformance. While Western photonics companies initially led development, production capacity has progressively shifted to China. Domestic manufacturers have leveraged cost advantages and technological capabilities to gain international market share, consistently exceeding performance expectations.
The industry progression timeline suggests CPO technology is currently in verification and trial production phase, with critical validation and initial mass production expected during 2025-2026. Full-scale penetration is anticipated post-2028, indicating a sustained growth runway for companies positioned in this ecosystem.
Manager Strategies: Conviction Versus Adaptation
The journey to creating doubling funds has followed different paths among portfolio managers. Some maintained unwavering conviction in their positions, while others demonstrated remarkable flexibility in adjusting their strategies based on evolving market intelligence.
Consistent Positioning Approach
Zhonghang Opportunity Navigation Fund, established in 2023, maintained consistent exposure to the ‘Yi Zhong Tian’ stocks throughout its existence. This steadfast approach allowed the fund to deliver impressive performance, building on its 20% H1 gain with an additional 97% advance since July. The fund’s strategy demonstrates the power of conviction investing in identified growth themes.
Strategic Reassessment and Portfolio Adjustment
In contrast, Jin Zicai (金梓才) of Caitong Fund initially reduced exposure to photonics stocks in Q1 2023, expressing concerns about potential risks in overseas computing investments. However, by Q2, he completely overhauled his portfolio, returning to substantial positions in the leading CPO companies. This decisive shift contributed significantly to his funds achieving over 90% returns in H2.
Jin explained his reversal in Q2 reporting: ‘Our tracking of global technology trends revealed that despite narratives about domestic computing power, overseas AI model development and capital expenditure not only remained robust but actually accelerated. This development contradicted concerns about computing power oversuppry and deflationary pressures.’
Risk Considerations in High-Flying Sectors
As valuations reach elevated levels, several fund managers are highlighting potential risks in the photonics sector. The extraordinary performance that created these doubling funds also brings attention to vulnerability factors that investors must consider.
Valuation and Technical Concerns
– Price-to-earnings ratios approaching historical highs for leading holdings
– Increased susceptibility to sector rotation given frequent theme changes throughout 2023
– Liquidity constraints as fund sizes expand rapidly, limiting position adjustment flexibility
– Concentration risk in narrowly focused portfolios
Divergent Manager Perspectives
Dongwu Fund manager Chen Weibin (陈伟斌) suggests that while medium-term valuation expansion remains possible, the most aggressive appreciation phase may have concluded. ‘The most violent rally stage is probably over. The行情 will likely transition from a ‘main upward wave’ to a ‘consolidation phase’ as the market digests previous gains,’ Chen noted.
In contrast, HuaBao Fund manager Zhong Qi (钟奇) maintains a more optimistic outlook, arguing that despite significant appreciation, industry growth rates should remain elevated for several years. ‘Although short-term volatility is inevitable, the AI-driven high-growth cycle should persist. The photonics golden track might just be beginning its long-distance run,’ Zhong stated.
Investment Implications for Global Allocators
The emergence of doubling funds in China’s market carries significant implications for international investors seeking exposure to technological innovation. The concentration of performance in specific sub-sectors underscores both the opportunity and specialization required for success in Chinese equity markets.
Strategic Allocation Considerations
– Sector specialization versus diversification approaches
– Active management value in rapidly evolving technological landscapes
– Monitoring capacity constraints in concentrated strategies
– Understanding regulatory environment and policy support dimensions
Forward Outlook and Market Positioning
The performance of these doubling funds reflects broader themes in China’s market evolution, particularly the intersection of technological innovation, global supply chain positioning, and investment strategy execution. While exceptional returns capture attention, sustainable performance requires navigating the complex risk-reward dynamics inherent in concentrated growth investing.
For institutional investors, the lessons extend beyond specific stock selection to portfolio construction philosophy, risk management frameworks, and strategic flexibility. The ability to identify emerging technological trends while maintaining discipline around valuation parameters remains critical for long-term success in Chinese equity markets.
As the AI hardware cycle continues evolving, monitoring both fundamental developments and market technicals will be essential for capturing opportunities while managing risks. The doubling funds of H2 2023 provide both inspiration and caution for investors navigating China’s dynamic equity landscape.
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