What kind of asset is really worth extending the duration?

High valuations are already a problem faced by more and more stocks. Li Dehui believes that the reason behind this is that more and more long-term money, and the longer and longer duration of market pricing, and the key question is, what kind of asset is really worth extending the duration?

What kind of asset is really worth extending the duration?

Li Dehui is the fund manager of CITIC JP Morgan Technology Frontier, Excellent Manufacturing, Smart Selection 30, Smart Selection Growth, and Wisdom Two-year Fund. According to the 2020 Four Seasons Report of CITIC Morgan, Li Dehui currently manages more than 17 billion yuan.

He started to formally act as a fund manager in November 2016. At the earliest, he paid more attention to the short-term industry prosperity. However, since 2018, due to the shrinking liquidity, the fluctuation of various assets has been large. After reflection, Li Dehui began to pay more attention to industry competition pattern. Now, he prefers industries with better demand expansion and supply patterns, and long-term victory over the market by selecting leading companies with strong barriers to competition.

“Under the background of the current high valuation of core assets, it is my current thinking to extend duration and focus on core variables.” Li Dehui believes that duration extension requires us to increase the requirements for long-term certainty, and it is good. The competitive landscape of China can overcome the disturbance of factors such as economic cycles and demand fluctuations, and obtain higher certainty and sustainability. From the perspective of the competitive landscape, the Internet and high-end consumption are two types of better assets, and they are high-quality assets that are worth extending.

 

Li Dehui, who is hailed as the “growing steady group” in the industry, has excellent medium and long-term performance of funds under his management since his tenure and ranks among the top of his class. Taking its longest-management JP Morgan Technology Frontier Fund as an example, Li Dehui has managed the fund since November 18, 2016. According to data from Galaxy Securities, as of December 31, 2020, China Investment JP Morgan Technology Frontier has nearly one In the past three years, the rate of return was 102.60% and 167.88% respectively, ranking among the top 4% in similar rankings.

Recently, Li Dehui accepted an exclusive interview with Blue Whale Finance and exchanged views on his investment framework and market outlook.

dialogue

The indicators of investment focus are not many

Question: You once said that you value ROE and growth the most. Can you elaborate on the specific stock selection criteria?

Li Dehui: One is to look at the level of ROE. After excluding the leverage ratio, a high ROE means that the company’s profitability is relatively strong; the second is to look at the growth rate, that is, to look at the company’s growth. Both of these are very important. For example, the ROE of home appliances is good but the growth rate is not high, so the valuation is far less than that of liquor.

In addition, from the perspective of time, it is also very important whether the company has sufficient competitive advantages to maintain a high ROE and growth rate. In the final analysis, any asset must be evaluated for its sustainability, that is, the company’s ability must be strong enough to cope with the possibility of worsening competition in the industry at different stages, which requires the company’s organizational structure, product echelon, and other aspects to be relatively strong.

I personally prefer platform-based companies with continuous growth. If it is not a platform-based company, a single product may be compromised by competitors, and the ability to resist risks is relatively weak. Typical examples include IC design companies and games. Company etc.

On the whole, being able to maintain ROE above 15% in the 3-5 year dimension will be a standard I refer to.

Q: How do you price the company valuation?

Li Dehui: Pricing depends on the duration, because now the entire market has more and more long-term money, so the duration of market pricing is getting longer and longer. The current valuations of many companies are getting more and more expensive, and you can only look at the long-term.

Therefore, I will price according to the evaluation method of reasonable forward market value. Assuming that a company grows by 30% every year, it means that it will double in three years, quadruple in six years, and nine times in nine years. Then we multiply the profit by nine times the current market value and discount it at 5-10 points per year.

The key question is, what kind of assets can extend the duration? This requires us to increase the requirements for long-term certainty.

Question: Which assets meet your above requirements for growth, sustainability, and long-term certainty?

Li Dehui: It depends on barriers on the one hand, and demand on the other. If the demand of an industry can rise steadily and the barriers are high, it is a very good asset in the long run.

I think the Internet and high-end consumption are two types of better assets in various industries. The Internet has extremely high network barriers, and high-end consumption has extremely strong brand barriers. The demand for both is also increasing, especially the mobile Internet. We once sold an Internet company due to valuation issues, but it turns out that it is easy to make mistakes just by looking at the valuation, and the market is pricing good companies for longer and longer periods of time.

Investing is actually very simple. It is to buy good assets. There are good consumer and pharmaceuticals in A-shares, and good Internet companies in Hong Kong stocks. If you can buy US stocks, you must buy hard technology.

Question: Then what is your criterion for making portfolio adjustments? Is it cost-effective? In the fourth quarter of 2020, you reduced your holdings of new energy and increased your storage of liquor and tax exemption. What is the main logic?

Li Dehui: Cost-effectiveness is difficult to evaluate. We should lengthen the duration and reduce the variables of concern. In comparison, I pay more attention to slow variables, such as the competitive landscape.

The demand side of new energy is very good, but the competitive landscape on the supply side is not clear. If the market price is more expensive, its long-term certainty will be greatly reduced. On the contrary, high-end consumers do not need to consider these issues too much, because their competitive landscape is better. Any asset will be disturbed by demand, but a strong supply side can overcome demand fluctuations to a certain extent.

The competitive landscape is the primary factor. No matter how good the industry is, the disorderly competitive landscape will not make money; the second is the expansion of industry demand.

Focus on long-term core assets that are not highly dependent on liquidity and macroeconomics

Q: Judging from the quarterly report, you will make certain timings. For example, in the third quarter of 2020, you will significantly reduce your position, second only to 2018. How did you think and judge at that time?

Li Dehui: In the first half of 2020, there was a round of liquidity-driven market, but since July 2020, due to the peak of liquidity, the market actually experienced a period of sideways fluctuations, and the market began to differentiate in August. During this period of time, I actually did not tend to adjust the position, but some funds came in, so the position was passively reduced.

By December 2020, the social financial sector had an inflection point, and the liquidity margin was confirmed to be tightened, but the stock market continued to remain volatile. According to historical law, after liquidity shrinks, the economy will peak in about half a year, and there will be a decline in corporate orders and shrinking residential demand. We predict that the inflection point of the market may not reach the inflection point in the second quarter of this year. Will confirm.

Question: After liquidity tightens and the economy reaches an inflection point, will the growth-oriented style end? What is your main combination now?

Li Dehui: It depends on whether these growth stocks will be affected by the economy. But most industries are related to the economy, but there are differences in strengths and weaknesses. For example, new energy vehicles, if the entire vehicle sales decline, new energy vehicles will not sell well.

In portfolio management, I will combine long and short, focusing not only on cyclical asset investment opportunities, but also long-term focus on core assets and the layout opportunities brought by core asset adjustments, and I am more optimistic about long-term investment opportunities in core assets. Specifically, I pay more attention to long-term core assets that are not highly dependent on liquidity and macroeconomics, such as pharmaceuticals, consumption, and the Internet in Hong Kong stocks. There is also a part of the manufacturing industry. Although the manufacturing industry will be affected by the economic cycle, its potential for globalization will overcome the disturbance of the domestic cycle.

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