Wang Ping of China Merchants Fund: Why did China Merchants Quantitative Select A outperform the market for 6 consecutive years?

"Investor's Network" Cui Yuechen

Recently, the second active quantitative fund led by Wang Ping, an active quantitative expert, China Merchants Growth Quantitative Stock Selection Equity Securities Investment Fund (Class A: 020901, Class C: 020902), was officially launched. The fund selects high-quality growth companies through a multi-factor quantitative model, strives for long-term asset appreciation, and provides investors with a new investment option for active quantitative funds.

According to public information, Wang Ping graduated from Central South University with a major in management science and engineering, joined China Merchants Fund in 2006, served as a quantitative analyst and senior risk control manager in the risk management department, and is now the director of the quantitative investment department of China Merchants Fund. At present, the total scale of fund products under management is about 13.6 billion yuan, and he has rich experience in investment management.

Since its inception in March 2016 to the end of the first quarter of this year, the first active quantitative fund managed by Wang Ping, China Merchants Quantitative Select A, has achieved a cumulative return of 140.27% and an excess return of 105.33%, and its performance in the last six years has exceeded the CSI 500 Index and the performance benchmark over the same period.

Among them, the return rate of China Merchants Quantitative Select A in the past three years is 34.84%, ranking 2nd in the same category (2/140), and the return rate in the past five years is 132.33%, ranking 1st in the same category (1/73).

So, how did Wang Ping create such an active quantitative fund that has outperformed the market for several consecutive years? What are the characteristics of his investment philosophy and investment strategy?

Q: What about your investment logic and the design philosophy of the quantitative model?

Wang Ping: I mainly select stocks based on the multi-factor platform of China Merchants Fund, focusing on fundamentals and supplemented by technical factors for stock allocation. Among them, the fundamentals are mainly to use the PB-ROE model for stock screening, which is to look for companies with low valuations (PB) and strong profitability (ROE) in the market.

To put it simply, the PB-ROE framework is to select stocks with certain growth (ROE) to invest in industries with relatively stable valuation centers (PB). According to this investment framework, in the past 8 years of operation, the fund has gradually shown the following results: first, the market value of individual stocks held is mostly concentrated in the range of about 10 billion; Second, the time point of opening a position is on the left, and the excess return mainly comes from valuation repair.

The PB-ROE model itself does not have a special preference for the market capitalization of the company, but in the current environment, large-capitalization companies have long been fully studied, and the market has long priced large-capitalization companies. After reviewing the attribution, I found that the fund did not have enough research on the small and medium-capitalization stocks of A-shares, and the expectation of earnings growth of related listed companies was insufficient, which was the fundamental reason for the small market value of the stocks screened by the PB-ROE framework.

The core of quantitative investment is that fund managers should have their own investment philosophy, for example, I myself am a value-oriented investor, which is very consistent with the PB-ROE model. This model can indeed find theoretically cheap and high-quality stocks, but doing value investing will face the problem of valuation traps, and I will use other factors to modify the model, fine-tune it, and eliminate those stocks that have actually fallen into the valuation trap from the portfolio.

Q: What do you think are the advantages of an active quantitative strategy? What is the outstanding performance of China Merchants Fund's active quantitative products?

Wang Ping: In my personal opinion, the advantages of active quantitative strategies are:

First, the coverage is wide, active investment, active research, relatively speaking, the number of stocks that an institution can cover is limited, and quantification is to rely on financial data, screening stocks in a low-cost mode, because it has this advantage, quantification in the field of small and medium-sized caps in the future space may be larger, with quantitative mode coverage is a more efficient way, input-output ratio is also more economical.

Second, the concentration of individual stocks in the quantitative portfolio is relatively low, the industry distribution is relatively balanced, if strictly compared with the benchmark, the risk-adjusted return may still be good, the characteristics of the quantitative strategy is that the tracking error relative to the benchmark is relatively small, while pursuing excess returns, the portfolio as a whole in all dimensions of risk exposure is relatively limited.

Third, from my experience in managing quantitative funds in the past few years, there are a few points that I can share with investors. First of all, our turnover rate is moderate, and secondly, many quantitative funds are regularly replaced, when the valuation of a stock is greatly increased or the trading volume is enlarged, the model will prompt to sell the stock, the change is against human nature, from the perspective of buying and selling, we can strive to overcome the weakness of human nature, which is also a major advantage of quantitative investment.

Q: Regarding your stock selection strategy, what is the general number of shares held and the scope of stock selection?

Wang Ping: The average position is about 170-200, and the stock selection range is mainly stocks outside the CSI 300. Although there is no clear control, the proportion of CSI 500 is about 15%-18%, and the rest are basically stocks of CSI 1000 and other CSI 1000.

Q: Will the proportion of the industry be controlled? How often do you change hands in daily operation?

Wang Ping: The overall industry allocation is balanced and scattered, of which the allocation of a single industry is basically no more than 20%, and the concentration of the top three industries is between 30% and 40%.

From the perspective of turnover rate, the turnover of China Merchants Quantitative Selection is at the upper level of the industry as a whole, except for the low turnover rate in 2018 and 2019, and the rhythm of stock swapping once a quarter has been maintained in the past three years. In addition, most of the individual stocks held by China Merchants Quantitative Select are held by other funds at the same time no more than 10, showing the characteristics of "not holding together".

Q: What are the problems you may encounter and what are the countermeasures?

Wang Ping: In my opinion, quantitative investment is a kind of investment concept of "putting death in the place and then revitalizing", and before each purchase occurs, it is necessary to calculate the maximum loss value that it may bring to the whole portfolio.

The biggest concern for me at the moment is that in the past four years, the excess of the CSI 500 Index has been relatively stable and more, which is likely to mean that more and more investors in the market have begun to adopt similar investment frameworks and strategies, and then inadvertently form a group, and lose the expected difference due to a high degree of consistency, which is not a good thing for quantitative investment products that focus on finding the expected difference as the main profit point. Therefore, my team and I are studying possible risk points in the market and planning how to iterate on quantitative factors to deal with them.

Q: What is your outlook for the market in 2024?

Wang Ping: In the first quarter of 2024, the benchmark index CSI 500 first fell and then rose, closing down 2.64%, in terms of industries, petroleum and petrochemical, home appliances, banking, coal, nonferrous metals and other resources and high-dividend industries rose greatly, and comprehensive, pharmaceutical, electronics, real estate and other industries fell first. The fund rose 3.19% in the first quarter, outperforming the benchmark, and the excess return fluctuated greatly, mainly because at the end of January and early February, with the market volatility and downturn, some structured products appeared knock-in scenarios, and at the same time, equity pledge, stock financing purchase and some products with early warning lines and liquidation lines triggered the corresponding terms and other factors superimposed, triggering local liquidity risks in the stock market, and our strategy had the largest drawdown in history, but after the liquidity risk was lifted, In the future, the fund will continue to be growth-oriented, build a portfolio by building a multi-factor quantitative investment model, select stocks with high performance, good quality and reasonable pricing, and strive to obtain investment returns that exceed the performance benchmark under the premise of effective risk control.