Several actively managed equity funds reduced their holdings in the baijiu sector during the second quarter, as capital rotated toward technology stocks. Brokerage data shows the average allocation to baijiu among these funds fell sharply to 1% by the end of June, down from 2.9% at the end of March. However, a few fund managers went against the grain, increasing their exposure to the struggling sector.
Where Managers Are Finding Opportunity
Fund manager Huang Hai raised his baijiu allocation in the Wanjia Macro Timing Multi-Strategy fund. Gujing Gongjiu Co Ltd, Shanxi Xinghuacun Fenjiu Factory Co Ltd, and Kweichow Moutai Co Ltd all entered his top ten holdings. These three positions represented 15.43% of the fund's net asset value at the end of Q2. Meanwhile, energy stocks like Huaibei Mining Holdings Co Ltd, Shanxi Coking Coal Energy Group Co Ltd, and Shanxi Coal International Energy Group Co Ltd were removed from the top ten list.
The Bode Consumer Intelligent Navigation fund increased its stake in Kweichow Moutai by 3,500 shares and in Wuliangye Yibin Co Ltd by 17,500 shares. Shanxi Xinghuacun Fenjiu also appeared as a new top-ten holding. Other consumer-focused funds held their ground. The Zhonggeng Value Pioneer fund added Luzhou Laojiao Co Ltd as a top holding, while the Yinhua Consumer Theme fund maintained its positions in Kweichow Moutai, Anhui Yingjia Distillery Co Ltd, and Shanxi Xinghuacun Fenjiu.
The Performance Picture
Despite these selective additions, the overall performance of consumer-themed funds has been pressured by the market's focus on technology. Data from Fund Library shows that consumer funds have posted declines this year, with more than a dozen products losing over 20%. The Penghua Wine fund is down over 18% year-to-date, and the China Merchants CSI Baijiu Index fund has fallen more than 20% in 2024.
Outlook for the Sector
The baijiu sector has undergone a deep correction this year. The CSI Baijiu Index fell more than 30% from its peak before bouncing over 13% from its July 10 low. In his quarterly report, fund manager Huang Hai argued that valuations for some brand-name consumer companies have fallen to historical extremes. He noted that the dividend yield for the sector is now 300 basis points above the risk-free rate, which he believes reflects market pricing for permanent decline. He sees this as a rich opportunity for long-term returns.
"The nature of investment is never about chasing the tail of a trend, but about placing decisive bets when the odds are favorable," Huang wrote. He realized partial gains in the energy sector and reallocated capital to undervalued consumer brands, media, and non-ferrous metals. Zhonggeng's fund manager Chen Tao reduced holdings in airlines and added to non-ferrous metals, baijiu with dividend yields above 7%, and domestic-demand-linked chemical and consumer stocks. He expects positive outcomes from policies aimed at expanding domestic demand.
Hou Hao, manager of the China Merchants CSI Baijiu Index fund, stated in his report that high-end baijiu companies are embracing the consumer channel. "The underlying logic and value attributes have not changed, and the structural strategic opportunities remain substantial," he said. Yongying Emerging Consumer Smart Select fund manager Jiang Weihua believes high-quality consumer assets have become attractive. He noted that after stress tests during the Spring Festival, leading baijiu companies can still generate reasonable profits for distributors. He sees a floor for earnings and manageable downside risk for valuations, though he warned that other baijiu brands face significant channel inventory pressure and a continued downward trend in earnings.
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