During the second quarter of 2026, the A-share market experienced a significant divergence in style. Technology sectors like artificial intelligence performed exceptionally well and continued to strengthen, while traditional industries such as finance, consumer goods, real estate, and infrastructure faced notable pressure. Such a pronounced style divergence is historically rare, pushing many value investors into a 'darkest hour' of their investment journey.
Headwinds, however, serve as the perfect test of conviction. The market's emotional vote may temporarily depress prices, but maintaining discipline within one's circle of competence and staying rational amid the storm could be the most sincere practice of value investing. As Warren Buffett said, 'In the short run, the market is a voting machine, but in the long run, it is a weighing machine.'
Lan Xiaokang, head of Zhongou Fund's value group and fund manager, recently admitted in a letter to investors: 'The market conditions over the past three months have been one of the biggest challenges we've faced in recent years, and our product performance has been unsatisfactory. Facing this market test, I have been continuously reviewing my strategies while increasing my stake in our products.'
It is understood that the Zhongou Fund value group collectively increased their holdings at the end of the second quarter, with six fund managers investing a total of over 8 million yuan through self-purchases. Among them, Lan Xiaokang personally invested 3 million yuan in three funds, including the Zhongou Dividend Premium Fund, and committed to holding for at least one year, demonstrating a shared resolve with investors to see things through.
Every setback is a setup for a better comeback. As the semi-annual reports are released, it's worth examining the thoughts and steadfastness of these value investors during this periodic headwind.
01 Fund Manager Lan Xiaokang of Zhongou Dividend Premium: Value Investing Seeks Long-Term 'Effectiveness' and Will Not Be Shaken by Short-Term Pressure
Lan Xiaokang had clearly outlined three potential risks following the outbreak of war in his first-quarter report. In retrospect, the market may have overpriced the risk of declining earnings growth for leading companies in traditional sectors due to a global economic slowdown. The most watched long-term theme globally is the competition for comprehensive national strength between China and the US. The recent US-Israel-Iran war, both strategically and tactically, significantly increases the burden on the US and weakens its global competitiveness. Following the conflict, the strategic value of new energy industries and coal chemicals has become prominent, helping China effectively meet this challenge.
Lan Xiaokang argues that a sharp decline in the stock prices of high-quality companies in China's various basic industries is illogical. In the current market, the price drop for these companies is more about a liquidity shock than a deterioration of fundamentals. Historical experience suggests that such forced selling often presents favorable opportunities for value investors.
As a seasoned value investor with years of market experience, Lan Xiaokang further emphasizes that the long-term 'effectiveness' pursued by value investing often comes at the cost of short-term 'inefficiency' or even 'failure.' In portfolio construction, he says he adheres to a long-term, stable expected return orientation, anchoring on the intrinsic value of companies. He focuses on opportunities to buy when prices are significantly below intrinsic value, which he believes helps secure sustainable absolute returns for investors over the long term, without wavering due to short-term pressure.
02 Fund Manager Liu Shiqing of Zhongou Value Discovery: Market Divergence is Rare, Bullish on Pharmaceuticals and Machinery Manufacturing
After a sharp decline in the first quarter, the market in the second quarter almost indiscriminately abandoned traditional economic sectors. Whether these sectors benefited or were harmed by the short-term impact of the war, they all experienced severe risk aversion. The strong expansion expectations of the AI industry chain caused a rush of market capital, leading to a rare divergence. Even within the AI chain, divergence occurred, with opportunities emerging in sub-sectors facing price pressures due to shortages, whose short-term gains outpaced some more traditional AI plays from the second half of last year.
Extreme valuation fluctuations in the market are approaching their limits, creating opportunities for undervalued stock prices. Facing such a market, Liu Shiqing states he will continue to adhere to a value investing style and maintain a relatively balanced allocation. He aims to select investment opportunities with reasonable cost-performance ratios from various aspects, preferring assets with longer duration of prosperity cycles rather than those relying on short-term supply-demand gaps for price increases.
In some sectors mentioned by Liu Shiqing in his first-quarter report, signs of recovery are already visible, such as pharmaceuticals, traditional machinery manufacturing, chemicals, and even some niche consumer manufacturing sectors. Their commonality is that competition within the industry has been cleared out, and demand is relatively stable, yet their stock prices performed poorly over the past quarter. In Liu Shiqing's view, looking forward to the next year, if the economy maintains its current trend, these sectors are expected to achieve accelerated operational earnings growth.
03 Fund Manager Fu Beijia of Zhongou Potential Value: Polarized Allocation and Three Main Themes Amid High Volatility
Looking ahead, Fu Beijia believes the most important macro variable remains the US dollar index. The meso-level variable is the pace and elasticity of domestic profit recovery (the sustainability of industrial enterprise profit recovery and the spillover effect of new infrastructure). The micro-level variable is the cash flow factor (with the volatility factor being more prominent in the first half). The biggest challenge this year may come from external liquidity shocks. Over the medium to long term, she is firmly bullish on sectors that remain on the left side of the cost curve and see improving industry structures amid every round of global supply chain shocks, therefore valuing China's HALO asset reserve opportunities.
Within Fu Beijia's investment framework, short-term demand changes are highly volatile, while medium to long-term supply-demand patterns and industry trends offer clearer visibility. She therefore prefers assets with strong supply constraints and high medium-term earnings certainty. Against the backdrop of increasing volatility in global capital markets, she leans towards a 'certainty + innovation' polarized allocation strategy, focusing on three main investment themes:
(1) Pro-cyclical inflection points: Benefiting from increased fiscal spending and low inventory levels, focus on low-valuation pro-cyclical inflection point opportunities with improving cash flow that have been impacted by short-term oil price adjustments. Bullish on the engineering machinery and chemical sectors.
(2) Innovation-sensitive: Focus on investment opportunities in industries with iterative upgrades, operating leverage release, and high technological barriers. Bullish on the power equipment and AI server sectors.
(3) High cost-performance: The fundamentals and valuation levels of the large financial sector showed a significant divergence in the second quarter. Among major global markets, only China's long-term interest rates have notably declined, reflecting overly pessimistic expectations. Bullish on the domestic non-banking financial sector, particularly insurance, which is expected to benefit from both the interest rate cycle and rising investment returns.
04 Fund Manager Yuan Weide of Zhongou Value Selection: Prefers Companies and Sectors with Improving Fundamentals over AI Hardware
As a traditional value investor, Yuan Weide candidly admits in his semi-annual report that he did not participate in the current AI hardware rally. The main reason is that the current return on investment for the hardware supply chain is too high—the payback period for most stages is just a few months. For a manufacturing factory, a payback period of a few months is clearly unsustainable over the long term. Furthermore, looking at the R&D investments of various companies, they have not built sufficiently high barriers to deter competitors from entering.
In Yuan Weide's view, bottom-up stock selection will become more important in the second half of the year. He will focus more on domestic-demand companies with high barriers and gradually improving fundamentals, as well as sectors like aquaculture and the real estate chain, whose fundamentals are about to improve or are at low levels. The high-quality companies within these sectors, due to industry downward pressure, have valuations that are already quite low. When industry headwinds are removed, they all have significant room for recovery.
Furthermore, policies from the first half of the year related to anti-involution, unified national market, and boosting domestic demand have seen their progress slow due to factors like overseas geopolitics, international relations, and technological changes. As these external factors gradually become clearer, related policies are expected to continue advancing, which will significantly alleviate investor concerns about China's long-term economic demand.
As reforms like anti-involution and the unified national market continue, the overall capacity utilization rate in the manufacturing sector is expected to rise. Corporate profit margins and cash flow should continue to improve, allowing newly generated cash flow to be distributed among shareholders, suppliers, and employees. As the consumption power of grassroots employees strengthens and the consumption willingness of the traditional middle class gradually recovers, overall societal demand for consumer goods and services will keep rising. The service sector is likely to become the main driver of new employment, continuously fueling the economy. Therefore, Yuan Weide emphasizes that he is not pessimistic about China's domestic demand and remains confident in the long-term value of the companies he holds.
Data source: Zhongou Fund, as of June 30, 2026.
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Class A redemption fee: Holding period < 7 days, 1.50%; 7 days ≤ Holding period < 1 year, 0.50%; 1 year ≤ Holding period < 2 years, 0.25%; Holding period ≥ 2 years, 0.00%. Class A has no sales service fee; Class C has no subscription fee; Class C redemption fee: Holding period < 7 days, 1.50%; 7 days ≤ Holding period < 30 days, 1.00%; Holding period ≥ 30 days, 0.00%; Class C sales service fee is charged at 0.80% per annum. Class E subscription fee: Amount < 1 million yuan, 1.50%; 1 million yuan ≤ Amount < 5 million yuan, 1.00%; Amount ≥ 5 million yuan, 1000 yuan per transaction. Class E redemption fee: Holding period < 7 days, 1.50%; 7 days ≤ Holding period < 30 days, 0.75%; 30 days ≤ Holding period < 1 year, 0.50%; 1 year ≤ Holding period < 2 years, 0.25%; Holding period ≥ 2 years, 0.00%. Class E has no sales service fee.
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