JPMorgan China Growth & Income (JCGI ) fund managers have sold out of e-commerce giant Alibaba and doubled their ‘overweight’ to industrial stocks to benefit from China’s drive to upgrade its manufacturing sector.

Although the Jack Ma run group was the portfolio’s best performer in a tough year that saw the trust’s asset value plunge 36.7%, fund managers Howard Wang and Rebecca Jiang (below) believed Alibaba would not return to its previous high growth after the government’s clampdown on tech companies and Ma in particular in 2020.

The sale was disclosed last month in annual results to 30 September, well before today’s news that Ma was ceding control of Ant Financial, the Alibaba spin-off whose stock market flotation was halted by Beijing in late 2020, signalling the regulatory assault on the sector that was to come the following year.

Reports that Ma is stepping back from Ant have lifted shares in Alibaba and companies connected to the operator of the Alipay mobile payment platform on hopes it means an end to the authorities’ scrutiny of tech stocks.

Lockdowns hurt

The annual results showed how China’s lockdowns in pursuit of ‘zero Covid’ led to an economic contraction that hurt the £343m trust. Borrowing, or gearing, of 15.6%, which helps when markets are rising, was a big factor in why the trust underperformed the 22% slump in the MSCI China index.

The decline in net assets was such the trust had to repay part of its £60m borrowing facility to avoid breaching loan covenants with its lenders.

However, since the financial year-end the closed-end fund has rebounded with the portfolio rallying 15.6% over three months, beating the 9.4% advance in the index. The shares have done even better as investor sentiment has improved, leaping nearly 21% to reduce their discount to NAV to under 6% from 15% a few months before. 

As China’s government has bowed to public opinion and scrapped its stringent Covid policy, the shares have jumped nearly 9% in the past month. 

Buying on lows

During the financial year, underweight positions in outperforming low growth sectors, such as energy and financials, were a big drag on performance, combined with overweight positions in growth sectors in healthcare, communications and tech.

Tencent, the internet giant that operates the popular WeChat app, remains the largest position at 9.3% of assets, as the managers believe its core competitiveness in social media and gaming remains unchanged.

The duo took advantage of the selloff to top up tech stocks they like, such as software supplier Beijing Kingsoft Office and semiconductor equipment producer Advanced Micro-Fabrication. Other growth stocks brought into the portfolio included e-commerce operator JD.com and freight and logistics company Kanzhun. 

Shift to industrials

But the biggest change over the year was piling into new industrial stocks such as ZhuZhou CRRC Times, a manufacturer of railway equipment; Beijing Haufeng Test & Control, a semiconductor testing equipment producer, and Dbapp Security, a cybersecurity software supplier. This lifted industrials to 13.9% at the end of October, 8% more than their weighting in the MSCI China index, according to the trust’s latest factsheet.

‘The government remains determined to ensure the continued upgrade of Made in China, a government initiative intended to make the manufacturing industry more advanced,’ the managers said.

In line with the company’s policy of paying 4% of net assets in dividends, the board declared four quarterly payouts of 5.7p per share during the year. In the current financial year, however, the payouts will fall to 3.42p per share, reflecting the slide in asset value in the year just gone.

Over five years the trust has delivered a total return including dividends of 36.6%, beating the 9.1% drop in the China benchmark. Over 10 years shareholders have enjoyed a 203.6% total return compared with the index’s more sluggish 75%.