At the end of June, Korea Investment Corporation (KIC), the country’s sole sovereign wealth fund, cleared all $221.5 million worth of its US holdings in Chinese internet giant Alibaba while pouring new investments into competitor Baidu.

The fund raised positions in Baidu by over 450% to 1.1 million shares, worth $228.7 million, according to KIC’s quarterly filing to the US Security and Exchange Commission (SEC) on Aug 12.

At around the same time, KIC also added holdings in Tencent Music Entertainment Group by 28% to 730,800 shares worth $11.3 million.

In total, the value of KIC’s 741 stocks on the US bourse increased 10% to $34.9 billion from April to June. Its top five holdings were Apple, Microsoft, Amazon, Google’s parent company Alphabet, and Facebook.

THE LONG ROAD

“We directly invest in stocks through thorough fundamental analysis. And recently, we are putting more emphasis on the importance of long-term investment in companies [that are worth investing in],” Lee Kyung-sik, KIC’s managing director and head of Equity Group, told AsianInvestor’s 14th Institutional investors Week Korea on June 22.

Lee Kyung-sik

By the end of May, KIC had $195.7 billion of assets under management (AUM), with about 40% in public equities.

“The most important investing principle is to become a long-term investor who can wait until the share price reflects the true value of a company through a thorough analysis of it,” Lee said, noting that tapering by the Federal Reserve; interest rate hikes; and the US-China conflicts are all important variables in the investment process.

“In terms of investment in [Chinese equities], attention should be paid to how much China can form and lead a self-reliant ecosystem in such promising industries as semiconductors and electric vehicles,” Lee said.

China’s three tech giants, Baidu, Alibaba, and Tencent – collectively known as BAT – are all involved in the smart electric vehicle business. Of the three, Baidu is the only one that has made it as far as the vehicle manufacturing stage.

Noting that US-China rivalry will be a mid- to long-term phenomenon that will continue for years, Lee said KIC has to closely monitor how the stocks related to America’s policies on China will be affected.

Following China’s proposed tightening of regulations on Chinese companies’ US IPOs, US regulator SEC said in late July that it will require additional disclosure documents from Chinese companies, including risks for investors on their China-operated businesses, before approving any new IPO applications.

JUMPING SHIP

From September to December 2020, KIC’s positions in Alibaba were around 1 million shares – but the stock’s market value slumped 18% from $305 million to $248.9 million by the end of 2020.

It was around this time that the Chinese government began a series of regulation overhauls and antitrust investigations on internet giants, starting from the suspension of Alibaba financial arm Ant Group’s initial public offering in early November.

Following months of antitrust investigations, China’s State Administration for Market Regulation fined Alibaba a record $2.8 billion in April.

In the first quarter of this year, KIC had slightly cut positions in Alibaba, before clearing all remaining 977,029 shares worth $221.5 million by the end of June, its SEC filing on Aug 12 showed.  

KIC declined to comment on individual share transactions beyond the regulatory disclosure.

Since November, Alibaba’s US share price dropped by half from $311 to about $165 per share on Thursday night. Baidu only slipped 9% in the same period, despite Beijing's latest clampdown on internet companies and private education groups after ride-hailing giant Didi’s $4.4 billion US IPO on June 30. 

ROOM FOR GROWTH

KIC mostly invests in countries or segments covered by the MSCI All Country World Index (ACWI), a global equity index that measures the equity performance in both the developed and emerging markets, and it doesn’t overweight or underweight specific countries or sectors, Lee told the June AsianInvestor event.

Lorraine Tan

The fund started to increase value stock positions and lowering Technology, Media, and Telecom (TMT) and other growth stocks since the value rotation began in November upon economic recovery.

While the first half of 2021 was a battle between value and growth stocks, Lee believes that high-quality growth stocks will lead the market in the second half.

“We need to build a portfolio focusing on growth stocks with reasonable valuations and whose companies achieve a good performance,” he said. “Growth stocks, such as electric vehicles, renewable energy, bio healthcare and IT, all look attractive, but we should pick up stocks that, most importantly, can withstand volatile market conditions in the future.”

A RATIONAL APPROACH

“Realistically, it is unlikely that the Chinese government is going to make the whole Internet sector nonprofit,” said Lorraine Tan, Morningstar’s director of equity research in Asia. “We believe investors should remain rational, sticking to their investment discipline and avoiding being influenced by sentiment,” she told AsianInvestor.

“Unlike the US market, which is rather overvalued as a whole, we still see quite [a few] opportunities for these Chinese companies [regardless of listing location], particularly following this pullback,” Tan said.

"But we believe investors could stay away from the sector until regulation risk subsides. From a valuation perspective, we believe BAT are all undervalued at this point after the sell-off."