Twenty years ago, while studying in China, Jian Shi Cortesi bought her first stock, Citic Guoan Information Industry. Telecoms infrastructure was the sector in vogue and Cortesi snapped up the Chinese company during an IPO.
Looking back, the Citywire AAA-rated manager admits she made mistakes early on in her career, but has since learned from them.
‘I bought Chinese A-shares, I was fascinated with the stock market while I was still at university. I bought all the books, magazines and newspapers that retail investors read and I tried all the approaches,’ Cortesi says.
‘The most important lesson I learnt was that trading on rumours or tips doesn’t work. If someone gives you a good stock tip, don’t take it.’
Cortesi has since swapped student digs in Beijing for an office at GAM in Zurich where she runs the $49.3 million (€45.4 million) JB EF China Evolution fund. Her performance shows she has clearly mastered investing now.
Over three years to the end of February 2017, her fund returned 36.3% compared with 16.8% by the fund’s Citywire-assigned benchmark. She has also been consistently Citywire-rated since January 2014, see line graphs and ratings graph below.
While Cortesi has made changes to her early investment strategies, she says other domestic investors are still stuck in their old ways and get caught out in periods of volatility.
‘The reason I say the Chinese A-share investor hasn’t changed is because I started out as one. I followed all of the rumours, so I know exactly how they behave. I learnt a lot from those mistakes. Everything I did was wrong for those two years but many other investors are still doing exactly the same thing.’
At the beginning of 2016, Chinese A-shares dropped significantly and triggered circuit-breaker mechanisms which were designed to reduce volatility and led to a temporary suspension of trade.
As much as 90% of Chinese A-share trades are conducted by individual domestic investors who move on speculation. This huge level of retail money can cause big swings.
‘They may change their minds on a company but not because of their investment process. These rumours or stories shift all the time. One month it could be defence stocks, the next cloud computing, or asset restructuring or Shanghai company reform.
'Then all of a sudden Auto Shanghai would become one of the hot stocks for a couple of months and then the stock price will start to run,’ she says.
Despite the potential volatility in the Chinese A-share market, Cortesi says investors can still find pockets of value and her early experiences helped her to understand what makes a good A-share company and how it should be priced.
Cortesi holds four A-shares in her fund but says they are expensive compared with those available in Hong Kong.
‘I think the A-share market is very inefficient. Retail investors, who drive 80% of the trading, don’t look at fundamentals. From time to time we can find quite interesting companies, even blue chips, trading at really cheap valuations, even in this expensive market. They are ignored by retail investors because there is no hot story surrounding these companies.’
One of the A-shares Cortesi holds is car manufacturer Auto Shanghai, which has production deals with Western firms and sells European cars to Chinese consumers. The blue chip company has about 20% of the market share.
‘It is a very large, stable company and about two years ago it was trading around five times PE and has a dividend yield of 8-9%. It has consistently made money, has good profit margins and a return on equity close to 20%. It was trading so cheaply because Chinese retail investors don’t like a company that is large and boring. These are the sort of opportunities we look for.’
This is an extract from the Star Manager feature of April’s edition of Citywire Selector magazine.