China Top Fund Manager Favors Resource Stocks as Oil Prices Fuel Inflation - Bloomberg

China’s top-performing fund manager is favoring resource and agriculture stocks as the country’s government intensifies its fight against the worst inflation in three years amid rising commodity prices.

Oil prices may extend this year’s surge amid concerns over supply disruptions in the Middle East, while demand for fuels will increase after Japan’s worst earthquake on record spurred countries to shelve plans to develop nuclear energy, Wang Cheng, co-manager of the China Southern Long Yuan Equity Investment Fund (SOINLON), said in a May 3 interview from Shenzhen.

The $1.2 billion fund, which Wang runs with Jiang Pengchen, rose 10 percent in the first quarter of this year, making it the best performer among 735 tracked by Howbuy, a Shanghai-based fund research company. PetroChina Co., China’s biggest energy company, and Heilongjiang Agriculture Co., a producer of rice, soybeans, wheat and corn, accounted for 15 percent of the fund at the end of March, data compiled by Bloomberg show.

“We can find some investment opportunity in areas like resources and agriculture,” Wang, who has been managing money for China Southern Fund Management Co. since 2002, said. “Global tensions recently have added fluctuations to commodity prices and brought negative impact to our inflation. The government will still focus on fighting inflation as labor costs will continue to rise and liquidity remains ample.” She declined to specify changes to her holdings.
Inflation Target

The benchmark Shanghai Composite Index gained 2.1 percent this year on speculation four interest-rate increases since October will tame inflation without slowing the economy. Consumer prices rose 5.4 percent in March from a year earlier, statistics bureau data on April 15 showed, exceeding the government’s full-year inflation target of 4 percent. The economy expanded 9.7 percent in the first three months, topping economist projections for growth of 9.4 percent.

The Long Yuan fund has beaten 95 percent of its peers in the past year, according to data compiled by Bloomberg. Stocks accounted for 74 percent of its portfolio as of the end of March, while bonds took up 4 percent and cash the remainder, according to the fund’s quarterly report.

Wang’s stock allocations are “low,” reflecting the fund’s conservative approach, said Zhang Haidong, an analyst at Z-Ben Advisors, a Shanghai-based funds advisor. The average stock allocation for 375 funds in the first quarter was 81.6 percent, down 1.7 percentage points from the previous quarter, Howbuy said in a report last month.

“Wang is among the most experienced players in the market,” said Zhang. “Her bet on more anti-inflation measures is fair and safe at the moment.”
Most Senior

Wang was described by China’s Securities Journal on March 7 as the most senior among 128 female managers in the Chinese fund management industry. Women account for 15 percent of the nation’s fund managers, the newspaper said, citing statistics from TX Investment Consulting.

PetroChina, whose shares gained 6.1 percent last quarter, was the Long Yuan’s biggest holding as of the end of March, according to its quarterly report. The company wasn’t among the fund’s top 10 holdings in 2010, the fund’s annual report said.

Crude futures in New York have jumped 22 percent this year amid unrest in the Middle East and North Africa and as Japan’s earthquake on March 11 compelled China and India to review plans for atomic energy. Power-station coal prices at Qinhuangdao port, a Chinese benchmark, rose to the highest level since October 2008, the China Coal Transport and Distribution Association said on May 3.
Shenhua Energy

“Some countries have suspended or delayed plans to build nuclear plants after Japan’s accident,” Wang said. “It will raise demand” for oil and coal.

China Petroleum & Chemical Corp. (600028), the country’s biggest refiner and second-largest oil producer, accounted for 4.96 percent of the fund as of March 31. China Shenhua Energy Co., a unit of the nation’s biggest coal producer, represented 4.75 percent. Shenhua surged 18 percent in the first quarter, while China Petroleum and Chemical advanced 5.8 percent.

“At the moment, the priority for the macro controls is fighting against inflation,” Wang said. “Further tightening measures will be carried out depending on inflation numbers.”

Food costs, which research company IHS Global Insight says account for about a third of China’s consumer prices basket, rose 11.7 percent in March from a year earlier, the National Bureau of Statistics said at a briefing on April 15. The United Nations FAO Food Price index jumped 25 percent last year, the second-steepest increase since at least 1991, and surged to a record in February.
Trading Rebound

Shares of Heilongjiang Agriculture, Wang’s fifth-biggest holding as of March 31, gained 8.3 percent in the first quarter.

Citic Securities Co., the nation’s biggest brokerage, accounted for 8.07 percent of the Long Yuan fund at the end of March, making it the second-biggest holding. The company’s shares climbed 11 percent in the first quarter on speculation earnings would benefit from a rebound in share trading as China’s stocks rose the most among Asia’s biggest equity markets in the first quarter.

For the second quarter, Wang is favoring manufacturers with “core technologies” as they are critical to the government’s economic plans over the next five years to move away from exports into fledgling industries such as technology and high- end machinery manufacturing.

The nation’s manufacturing sustained its expansion in April, a purchasing managers’ index showed May 1. The index was 52.9 in April, compared with 53.4 in March, China’s logistics federation and the statistics bureau said. A reading above 50 indicates expansion.

“China’s economic growth has shown signs of stabilizing,” Wang said.

--Irene Shen. With assistance from Zhang Shidong. Editors: Darren Boey, Allen Wan

To contact Bloomberg News staff for this story: Irene Shen in Shanghai