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Securities Times reporter An Zhongwen and Zhao Mengqiao

Low valuation is the core logic for many fund managers to abandon growth stocks and embrace high dividend strategies in a weak market. However, when the high dividend strategy becomes the goal pursued by various fund managers, and even fund managers who originally had heavy positions in growth sectors are forced to drift, this strategy begins to diverge and signs of a retreat begin to appear.

In fact, after a huge adjustment, many current growth stocks are no less inferior to utilities and cyclical stocks in terms of cash reserves, dividends and buybacks. The frequent emergence of this new type of "value stock" is likely to become an important direction for fund managers to adjust their portfolios in the future.

High dividend strategy continues to strengthen

Since the beginning of this year, against the backdrop of a weak economic recovery and a relatively sluggish stock market, more and more public fund managers have begun to embrace high dividend strategies.

In an interview with a Securities Times reporter, Wang Li, senior macro-strategy researcher at Great Wall Fund, believes that the economic fundamentals have been in a weak recovery tone since the beginning of this year, and the introduction of new real estate policies has not yet reversed the downward trend in housing prices. The current situation of insufficient demand in the real economy and weak expectations has led to a reduction in high-prosperity industries and a downward revision of performance growth, and high-dividend assets are temporarily favored.

"The market is highly risk-averse, with sharp market fluctuations at the beginning of this year. The subsequent tightening of supervision indirectly led to two sharp declines in small and micro-cap stocks, and from the perspective of the market's money-making effect, less than 15% of stocks have risen this year, which is comparable to the level in 2018." Wang Li said that under this background, capital investment preferences pay more attention to stability, and high-dividend assets continue to be the focus of the market.

Sun Yue, fund manager of the Quantitative Department of CSOP Index, believes that the high dividend strategy shows strong defensive characteristics, and some investors invest for risk aversion purposes. After the market recovers from the bottom, the high dividend strategy is mainly reflected in the logic of following the rise. After the market recovers to a certain extent, investors believe that the performance of the growth sector is still uncertain. At the same time, with the release of the new "Nine National Policies" and other policies, the market's recognition of high dividends has further increased.

Obviously, the logic behind the high dividend strategy becoming the dominant force in the market in the early stage is that the stock market's earning effect continues to weaken, especially after the small-cap stock strategy has largely failed, the risk aversion of fund managers has increased significantly. At the same time, the intensive issuance of ETF funds has also strengthened the high dividend strategy.

Wang Li believes that ETFs and insurance funds are the main sources of incremental funds in the market this year. The high growth in premiums has brought about huge demand for insurance fund allocation, and ETFs have flowed in against the trend during periods of sharp market fluctuations. These two types of funds naturally prefer high-dividend assets, and the allocation ratio of banks and utilities is significantly higher than that of active equity funds. The support of incremental funds has further driven the strengthening of high-dividend assets.

Opinion differences grow

However, as many fund managers have said, no single strategy can consistently outperform the market, and as high dividend strategies continue to gain strength, market divergence has begun to widen.

Securities Times reporter noticed that the CSI Dividend Index had a cumulative increase of more than 15% from the beginning of the year to May 22, leading a number of broad-based indexes. But then it began to pull back, and as of August 16, the overall increase for the year was only 2.48%. Although the gains have been exhausted, the dividend market still stole the show in A-shares. In fact, the dividend strategy is not a sector that has emerged this year. In the past three years, against the backdrop of fierce rotation of various concepts and industries, the dividend index has been quietly at the forefront. Against the backdrop of intensified market fluctuations, dividend assets with smaller fluctuations and more stable expectations are particularly valuable.

The rapid development of high dividend strategies has also led to a significant divergence in the internal rate of return of equity-oriented funds. Data shows that among equity-oriented funds, the highest annual rate of return is the Yongying Dividend Preferred Fund, which has a rate of return of 26.94% so far this year. The bottom-ranked Jinyuan Shunan Industry Select Fund has a year-to-date loss of 43.57% due to its heavy investment in growth stocks in the early stage. The performance gap between the two is more than 70 percentage points.

It is worth mentioning that Jinyuan Sunan Industry Select Fund, which ranked last in performance, began to increase its holdings of high-dividend stocks with Chinese characters in their names at the end of June this year. Obviously, under the pressure of performance, whether the fund's shift to high-dividend stocks at this time is a natural move or a forced adjustment remains to be seen.

"The rising trend of high-dividend and other debt-like assets has actually continued for many years. We believe that the current dividend assets may have exceeded the scope of deep value and are gradually moving towards a bubble." Penghua Industrial Upgrading Fund Manager Jiang Xin believes that the stock-debt ratio is at its highest level in history and the market risk appetite is still very low, but many equity assets have undergone long-term and substantial adjustments, and the valuation level is already very low, with extremely high cost-effectiveness.

Some institutional investors also believe that since the core assets peaked in 2021, the stock market style has shifted from growth stock track investment to dividend investment that focuses more on valuation. This shift has lasted for more than three years. Even if this time is different from history, some assets or logic will show a long trend, but once it continues for three years, there will often be some changes.

Who is cheaper?

Regardless of the asset or strategy, cheapness and cost-effectiveness are the core criteria for public fund managers to choose. As more and more growth stocks fall into "value stocks", fund managers have to think about this question: which one is cheaper?

The emergence of a large number of new "value stocks" comparable to utilities and cyclical stocks is a direct factor for many fund managers to increase their Hong Kong stock positions after June. Wang Shicong, manager of Southern Hong Kong Growth Fund, believes that as the Hong Kong stock growth sector has significantly increased shareholder returns this year, it has already possessed strong value attributes. Not only are its valuations and comprehensive dividend yields similar to those of the public utilities and cyclical industries that are popular in the market, but it also has better growth and a healthier balance sheet. It is expected that the attractiveness of the new "value stocks" will gradually increase.

Take the Hong Kong-listed Yidu Technology, which was completely cut by fund managers last year, as an example. The stock has fallen by as much as 94.2% in three years, and its current market value is only HK$3.58 billion, which is lower than the company's cash assets of HK$3.7 billion. Similarly, after the stock price of Yimaitong, which is positioned as China's largest doctor platform, plummeted by 80% in three years, the company's total market value was only HK$5.6 billion, but the company's cash funds were HK$4.8 billion, and the company's performance has been growing steadily for many years. This new type of "value stock" continues to emerge, attracting the attention of many A-share value-themed funds. For example, many growth funds, medical-themed funds, and value funds under Guotai Fund have begun to cover and even hold a large position in Yimaitong. According to the second quarter report disclosed by Guotai Value Pioneer Fund, this A-share value-themed fund has listed Yimaitong as its largest holding.

Qiu Dongrong, who recently resigned from Zhonggeng Fund, also explained the risk issues after dividend assets were sought after in the second quarter report. In his opinion, the high dividend strategy can obtain high returns, which is likely to come from the superposition of other factors, but investors like to continuously strengthen successful strategies and prefer linear transactions, while ignoring the continuous accumulation of actual risks. In fact, changes in cycles, growth, capital supply or innovation may challenge the stability of high dividends.

"Profit risk is definitely the primary source of risk. Traditional energy sources such as energy, coal, and oil have relatively strong profit cycle risks." Qiu Dongrong pointed out that the valuation of dividend assets is at a relatively high level, resulting in insufficient implied return rate, while the market is relatively low and the opportunity cost is higher.

Tan Li, fund manager of Harvest Fund, has begun to moderately reduce holdings of some dividend assets, mainly upstream resources, which are also the assets with the largest increase in the past two years. She explained that after the continuous rise of dividend assets, the valuation has become reasonable. To continue to rise, the expectation of rising commodity prices needs to be further strengthened. From the perspective of investment cost-effectiveness, the attractiveness has declined.

Earnings quality is the key to stock selection

So, at a time when the price-performance ratio of growth stocks and dividend assets is undergoing major changes, where will the core positions of public fund managers concentrated in the high-dividend sector go?

Miao Donghang of Morgan Stanley Fund believes that for investment in equity assets, it is ultimately necessary to return to the fundamentals of the industry and the company. Unlike many years ago, the current market pays more attention to the profit situation of the company rather than the capital operation of the company, and the investment methods of A-shares and mature markets are converging. "For example, the Internet industry naturally has scale effects and network effects, utilities exclude competitors through franchising, and resource companies obtain continuous cost advantages through low-priced mining rights. Entrepreneurial ability is more important in industries with more competition. Excellent entrepreneurs can understand the nature of the industry and the development trend of the industry, so as to formulate the right corporate strategy." Miao Donghang said.

Sun Yue, fund manager of Chuangjin Hexin, believes that the market has reached the bottom after a major adjustment, and investors are beginning to look for new investment opportunities. Looking ahead, the importance of valuation has increased significantly, while steady growth in earnings remains important. Taking both value and growth into account, and pursuing high-quality performance growth under the premise of valuation protection, may be an effective strategy for coping with the future market environment.

Sun Yue believes that in the past market environment, especially in 2019-2020, the consumer and pharmaceutical sectors were regarded as typical growth stocks by investors for investment, which is why there was a sharp rise in the past. However, from the beginning of 2021 to now, the growth logic of these two sectors has been destroyed to some extent. Therefore, the market in recent years has mainly been reflected in the valuation digestion. Consumption and medicine will still be one of the important investment sectors, but the value attributes will be further improved, the valuation requirements will be higher, and there will be higher requirements for the sustainability of performance.

However, after the crowding of high dividend strategies increases, there are still differences of opinion on whether consumption and medicine will become new positions. Liu Xin, fund manager of Noah Fund, believes that the current consumer sector is still in a relatively stressful stage from a fundamental point of view, and the economic fundamentals lack strong support for the consumer sector. "Relatively necessary consumer goods cannot currently achieve both quantity and price, and industry competition has obviously intensified. Against this background, the consumer sector still needs to look forward to continued policy efforts. The national level has continued to introduce equipment updates, old-for-new policies, and opinions on promoting high-quality development of service consumption. The effect of policy implementation still needs to be observed in the future." Liu Xin emphasized.