Funds are increasing their exposure to hi-tech stocks as they seek to profit from the burgeoning consumer demand in the world's second-largest economy. However, according to the latest S&P Capital IQ Fund Research survey, Lau believes managers are paying over-the-odds for search engine Baidu and social networking site Tencent.
Data from FE Analytics shows that Tencent has been the most-bought stock in the IMA China/Greater China sector over the past year, but Lau – who has returned more than any FE Alpha Manager over 10 years – says he is becoming concerned by its valuation.
Baidu has been another popular choice for investors hoping to profit from the spread of the internet in the country, but Lau refuses to hold it in both First State Greater China and First State Asia Pacific.
"Lau reported he is becoming increasingly concerned over the valuation of Tencent, which is currently trading on a forward price/earnings multiple of 25 times and he does not hold Baidu, as he deems it too expensive," said John Monaghan, fund analyst at S&P Capital IQ.
"Tencent is Mike Shiao at Invesco’s second-largest holding – at just under 7 per cent – but he shares a similar view to Lau on Baidu and is waiting for the share price to fall below $120 before re-entering."
Our data shows that Baidu is currently held in six funds' top-10 and is the seventh most-sold stock over the past year and the most sold over three months.
Fidelity China Consumer has the greatest exposure to Tencent, holding 8.3 per cent in the company.
The fund was launched last year to focus on companies that sell to the Chinese consumer, and data from FE Analytics shows its performance has been broadly flat so far, although it has lagged its benchmark.
Performance of fund vs sector and benchmark since launch
Source: FE Analytics
The smartphone market is also gaining attention, according to the report, with managers buying both operating companies and producers of chips and components.
Data from FE Analytics shows China Mobile is one of the 10 most-bought stocks by funds in the sector.
Competitors China Unicorn and China Telecom have not had as much attention, although the report says they have been gaining ground on China Mobile.
Pictet Greater China, a top-quartile performer in the IMA China/Greater China sector over three years, has 5.2 per cent of its AUM invested in China Mobile, making it the fund’s second-largest holding.
Performance of fund vs sector and benchmark over 3-yrs
Source: FE Analytics
Smartphone-part manufacturer Hon Hai Precision Industry, better known as Foxconn, also appears in the fund’s top-10.
In Latin America, the report points to the growing trend of investing in further education, with this a particular concern of the MFS Meridian Latin American Equity fund.
Manager Jose Luis Garcia has been investing in distance-learning services, an industry with strong potential in large countries with huge rural areas, such as Brazil
Data from FE Analytics shows that the fund is down 9.52 per cent since launch.
Eastern European funds, on the other hand, have seen a slowdown in investor interest, with the eurozone debt crisis acting as a drag on demand.
Returns have also been hit by the preference in the current risk-off environment for higher-quality companies with earnings certainty and sound management teams, the report says.
Corporate governance has proved to be an issue for several participants in the region and this is another reason why investors have been reducing exposure.