At a recent quarterly forum, fund manager Cao Jin from Fullgoal Fund elaborated on his investment philosophy, focusing particularly on his approach to investing in technology stocks.
For the domestic market, investors must recognize the specific market environment they operate within. A thorough understanding of the local market is essential for successful investing. The market strongly favors narratives around "era beta," a preference for growth stocks, and the performance of companies with high net profit growth. This trend is evident not only in China but also in the United States.
Cao Jin disclosed that he has held positions in optical modules and related companies since 2023. The core strategy is to capitalize on supply-demand imbalances within an industry. Even if these imbalances are cyclical, the resulting excess returns can be substantial.
A third sector Cao Jin is optimistic about is 3D printing, following his previous positive outlook on pet food and AI. He has been disclosing his holdings and major positions in quarterly and annual reports throughout 2024. He views 3D printing as an emerging industry with significant growth potential and room for increased penetration over the next 3 to 5 years. His portfolio already shows significant exposure to this sector as of 2024, and he expects it to perform rapidly.
Cao Jin noted that mispricing is often easiest to identify in familiar sectors. Furthermore, high-quality companies frequently develop a second growth curve, which tends to resonate well with the market. He provided several examples: The internet sector, which he believes is far from a sunset industry, continues to offer grand narratives, though the focus has shifted more towards practical implementation. Secondly, regarding the Apple supply chain, he began acquiring substantial positions in PCB-related companies starting in 2024. Analysis of their financial statements indicated these companies had bottomed out, with clean balance sheets. The narrative for the Apple supply chain is closely related to the future AI server industry, as there is significant technological overlap with the PCB companies involved. These positions have subsequently performed well. Thirdly, he took major positions in key new energy stocks when they were at very low levels; one of these companies is now among the largest by market capitalization on the ChiNext board.
Cao Jin's technology stock strategy is based on two points. First, identifying Smart-beta opportunities, which always arise during phases of constrained supply or production bottlenecks. Second, after the Smart-beta phase, an Alpha phase emerges where leading companies continue to perform across market cycles and expand their operations up and down the supply chain.
The greatest appeal of growth stocks lies in identifying sectors where the Return on Equity (ROE) is in an upward cycle. For instance, the recently popular optical module industry had very low profit margins and ROE three to four years ago. However, with changes in major clients and industry trends, the ROE has surged impressively over the past few years.
Cao Jin, Assistant Director of Equity Investment and Senior Equity Fund Manager at Fullgoal Fund, has 17 years of industry experience and has been with Fullgoal for over 12 years. He previously worked at HSBC Jintrust Fund, advancing from analyst to fund manager before joining Fullgoal in 2014. The total assets under his management currently amount to 14.166 billion yuan. Nearly all products he manages have nearly doubled in returns over the past year. His major holdings are concentrated in new energy, electrolytic aluminum, and the AI hardware supply chain.
His flagship product, the Fullgoal Small and Mid-Cap Select Mixed Fund A, has achieved a cumulative return of over 566.60% since its inception 11 years ago. It has doubled in the past year, with a return of 131.14%, gained 41.74% over the last six months, and returned over 20% in both the past one-month and three-month periods.
In a quarterly report disclosed on April 22, Cao Jin stated that while the macro environment faced multiple geopolitical challenges in the first quarter and the direction of the Middle East situation is unpredictable, one can analyze the supply-demand balance of resources and the impact of commodity prices implied by stock prices. He holds a relatively optimistic view of China's position amidst these geopolitical changes. Looking ahead to the second quarter, he believes data for new energy and electrolytic aluminum in the export chain is expected to improve, and the AI industry will likely remain the most significant industrial trend.
He believes the global AI industry trend, led by overseas giants, is entering a new wave of investment. Unlike the past, mainland China's supply chain is playing an increasingly crucial role in this new supply chain landscape. As competition intensifies between GPUs and TPUs for AI chips, the industry's demands on suppliers are increasing, which benefits mainland suppliers in gaining a larger market share. Mainland supply chains lead globally in response speed, electrical performance processing, and expansion enthusiasm. He forecasts that the share of mainland China's AI hardware supply chain could continue to rise by 2026.
Cao Jin also pointed out that as scale increases, profit expectations for 2026 might moderate appropriately. However, having adjusted the valuation percentile of his portfolio and introduced stocks at lower levels, he will continue to seek out companies with healthy business models along the industry trend to aim for steady returns.
During this roadshow, Cao Jin detailed his investment philosophy: first, understand the market; then, understand oneself; and finally, understand cycles. He believes technology stocks are never short of "era beta," and investing in them is a method well-suited to China's market conditions—the A-share market consistently favors this "era beta" investment narrative.
Regarding how to excel in tech stock investing, he shared his two sources of "alpha." The first alpha involves identifying opportunities in the technology sector early, on the left side of the trend. He cited pet food, AI, and 3D printing as examples of new industry cycles, noting that purchasing a stock constitutes only 20% of the investment process; the remaining 80% involves continuous tracking. The second alpha involves reusing experience, which he calls the "conveyor belt sushi" strategy. As a fund manager with 17 years of experience, he believes leveraging past experience is crucial. Using the internet, Apple supply chain, and new energy as examples, he pointed out that these sectors are never lacking in grand narratives but place greater emphasis on practical execution.
He firmly believes these industries are far from being sunset sectors. Excellent companies will inevitably find their second growth curve. The key to investment boils down to two things: accumulating experience and conducting persistent tracking.
The essence of his approach is to first focus on the "era beta," understanding the overarching market trends. A fund manager must then find their own alpha within their circle of competence, as it's impossible to seamlessly switch between every industry trend. Knowing oneself is paramount; a fund manager's alpha stems from self-awareness—understanding one's own personality and ensuring it aligns with their investment style. Cao Jin describes his own性格 as INTP (from the Myers-Briggs Type Indicator): independent-thinking, introverted, curious about new things and future trends, strong-willed with a focus on data and verification, and open to embracing emerging changes.
His two alphas are: 1) The ability to identify technology sector opportunities early, and 2) The effective reuse of experience. For early identification, he emphasizes curiosity about life and new developments, independent and contrarian thinking for selecting quality stocks at low points, and the courage to experiment and learn from mistakes. The core is grasping the industry's essence and understanding the shift in its growth potential and addressable market. Investment in such sectors hinges on identifying the industrial logic ahead of earnings realization and valuation increases.
Regarding reusing experience—the "conveyor belt sushi" strategy—he stresses that deeply researched companies allow for greater sensitivity to second-wave opportunities, making it easier to spot inflection points in financial statements and mispricing in familiar territories. Excellent companies often have a second growth curve that resonates with the market.
Summarizing how to invest in technology industry cycles from the left side, Cao Jin highlights that cognition is primary. While one can only profit from what they know, cognition can be improved through broad exposure and numerous company visits and management interactions. Secondly, investment tracking is crucial; stock selection is only 20% of the process, while 80% involves tracking industry changes, which is labor-intensive. Thirdly, left-side investing can be isolating, as views are often not widely shared initially, requiring continuous communication and discussion.
For investing in "conveyor belt sushi" type companies, deep prior research and precise understanding of the previous cycle are vital for a quick reaction in the next cycle. Reviewing past investments is key to accumulating experience, though the narrative might change each cycle; the company's core essence often remains. Tracking these companies is also a critical way to validate one's thesis. While many such companies are large-cap, seemingly lacking surprise or significant expectation gaps, increasing proficiency comes with years of experience.
On the topic of cycles, Cao Jin explains that after over a decade in the field, maintaining alignment with industry rhythms requires understanding cycles, which differ across sectors. Unlike the traditional "Merrill Lynch Clock," growth and tech stock cycles are different. He visualizes a disconnect between the market sentiment curve (solid line), which can be overly optimistic initially (e.g., current AI sentiment) or pessimistic (e.g., AI sentiment a year ago), and the industry penetration rate curve (dotted line), which steadily advances regardless of sentiment fluctuations. The investment challenge is to gradually align the sentiment curve with the fundamental penetration curve, as markets are often overly optimistic short-term but overly cautious long-term.
He cautions against simplistic applications of concepts like mean reversion (the idea that stocks that have risen too much will fall, and vice versa), as this can lead to selective bias, causing investors to miss super growth stocks that consistently deliver high growth for years. Similarly, the contrarian mantra of "be fearful when others are greedy and greedy when others are fearful" isn't universally applicable; many top performers in recent years were heavily held by funds. Fund ownership is often a result of a stock's quality, not the cause of its performance, and perspectives differ vastly between short-term trading and long-term investment horizons based on the company's development cycle.
For investing in hard technology cycles, Cao Jin focuses on three phases: industry recovery, ROE surge, and frenzied financing, while avoiding phases of oversupply, industry consolidation, and ROE decline. Domestically, capital expenditure in hard tech is very pronounced, often leading to overcapacity issues. It's crucial to avoid the left-side phases and focus on the right-side opportunities during periods of rising product prices and industry景气. However, one must be wary of the supply cycle phase involving excessive financing and oversupply, as seen clearly in some new energy sectors in 2021.
Finally, on evaluating business quality, Cao Jin emphasizes that the prime appeal of growth stocks is identifying sectors where ROE is in an upward cycle, rather than looking at ROE statically. While top-quartile businesses like premium baijiu, high-end digital products, and premium medical aesthetics have excellent, proven business models with high ROE (analyzed via DuPont analysis into margin and turnover), even the best businesses can underperform during downturns (e.g., baijiu during 2012-2016). The most significant opportunity lies in the *transition* of ROE. The optical module industry is a recent example where ROE was very low a few years ago but surged due to changes in key clients and industry trends. Similar transformations occurred in the Tesla and Apple supply chains. The greatest attraction of growth stocks is not the static quality of the business, but a sudden, positive change in that business's fundamentals.
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