Zhou Weiwen, Chairman of the CEIBS Equity Investment Committee: Practicing the concept of long-term value investment and building an investment and research culture with Sino-European characteristics

China Fund News reporter Cao Wenjing

"The longer the cycle, the more open-minded you become, and the more you feel that there are variables everywhere, not constants." Zhou Weiwen, Chairman of the CEIBS Equity Investment Committee, believes that the research of companies and industries must be comprehensively analyzed by points, lines, areas and bodies, and cannot be separated from the times and society. The difficulty of investment is to grasp the long-term trend, and the important thing is to understand and gain insight into the long-term development of the industry and the company.

Zhou Weiwen has been engaged in the securities industry since 1999, insisting on in-depth fundamental research, and constantly iterating the concept and methodology of long-term value investment in the midst of market bull and bear changes. In 2011, Zhou Weiwen joined CEIBS and currently serves as the chairman of the equity investment decision-making committee, responsible for the decision-making and management of the company's equity investment.

Zhou Weiwen firmly believes that "slow is fast", emphasizing that in the era of institutional investment, fund products must rely on in-depth insights and insight into long-term fundamentals to achieve stable and sustainable long-term performance. He focuses on promoting the iteration and upgrading of the investment and research system of CEIBS, advocating a research method that combines depth and breadth, and emphasizing teamwork and a culture of equal and free communication.

Over the past 25 years, Zhou Weiwen has experienced the earth-shaking changes in China's capital market. As a "veteran" in the mutual fund industry, how has his value investment philosophy and investment framework evolved? In the face of a volatile market, how does he grasp the dividends of the times? How does he disseminate the idea of long-term value investing within CEIBS? And how to achieve the integration of investment and research? What are the experiences in the construction and training of talent echelons? A few days ago, a reporter from China Fund News interviewed Zhou Weiwen.

Long-term foresight and insight

It is the core competency of value investing

China Fund News: What do you think is a real value investor?

Zhou Weiwen: First of all, we need to be clear about what is not value investing. Some track investments, when the bubble is very large, continue to increase positions, that is not value investment. Value investing is not the same as contrarian investing, nor is it the same as buying only low valuations. Value investment is to buy stocks that will have a greater increase in market value and significantly improve the company's operation in the future. Value investing is future-based and can only be tested by future market capitalization.

China Fund News: How has your value investment philosophy evolved over the past 25 years?

Weiwen Zhou: In the early days, like most investors, I liked to use the discounted cash flow (DCF) model to assess the value of a business. Over time, I came to understand the daunting nature of valuing businesses from a long-term perspective, and I began to delve into quality companies that can continue to grow through the volatility of economic cycles.

Since joining CEIBS, my investment horizons have gradually broadened and my understanding of the industry has deepened, enabling me to use the DCF model more accurately for long-term pricing. I have come to realize that in five, 10 or even 20 years, the market may not be growing steadily, but will be volatile. The core of investment is pricing power, short-term investors may rely on poor information or short-term earnings forecast differences, but as a value investor, I am more concerned about the long-term prospects of the company, and only by sticking to a long-term perspective can I make a significant difference from others in market pricing, so as to identify and seize investment opportunities.

Overall, with the development of the market and the accumulation of experience, my investment philosophy has gone through many iterations, from focusing on short-term financial indicator forecasting in the early stage to focusing more on the long-term competitive advantage and market position of the company.

China Fund News: Does the DCF model still adapt to the current market environment?

Zhou Weiwen: There are indeed many ways to invest in the market, such as betting on the track, taking advantage of short-term information gaps, or investing based on poor earnings forecasts in the next year or two. In my opinion, there is only one theoretical method at the core of corporate pricing, which is DCF, which can be used regardless of whether the company is losing money or making a profit.

In fact, it is not the DCF approach that is important, but the insight into the future. The difficulty of the DCF model is not to look at the next two or three years, but to look at the future for a longer period of time, five, ten or even twenty or thirty years. I have always believed that to do long-term fundamental value investment, we must do the company's profit forecast in the next few years, and try to do better than others, but more important is the understanding and insight of the industry, the company's long-term development, revenue, profit, and cash flow in the next five or ten years.

China Fund News: What capabilities do you think you need to grasp the long-term value of the company in the future?

Zhou Weiwen: The key is two abilities, one is the long-term cognitive ability of the industry, and the other is the long-term cognitive ability of the company.

DCF is based on medium- to long-term pricing, when the long-term is not clear, one way is to find good companies, and never invest in bad companies. There are two perspectives: bottom-up and top-down. As my experience has increased, I have become more important to the industry. To evaluate a company, we must first look at its position in the industry, such as the strong competitiveness of the industry leader, the continuous improvement of market share, high ROE and net profit margin, strong R&D capabilities and sales capabilities, and whether the company's products are on the rise in the next few years.

To grasp the core genes that determine the company's future development and determine the company's long-term development space, you can use DCF to discount and estimate the company's value range.

At the same time, it is necessary to pay attention to the buying and selling points. The low point of the stock price and the low point of the operation may not be synchronized, and the stock price is affected by many factors, and it is difficult to judge the inflection point.

The consideration of the selling point also involves two aspects: first, whether the business status of the industry or company has reached the high point of the cycle or the high point of the stage, which is also a time period; The second is whether the stock price has reached valuation expectations.

China Fund News: What do you think about the relationship between "value" and "growth"?

Zhou Weiwen: Many emerging industries are not new in nature, and you can't blindly invest just because they have the "label" of an emerging industry. In addition, some so-called growth investments are not real growth investments that only look at profit forecasts for the next two or three years. Growth must be based on long-term considerations, which is the core of DCF, which is priced based on performance over the next 10, 20 or even 30 years.

Mathematically speaking, DCF treats the net profit of each future year as a variable, if the value discounted back in N years is significantly higher than the current stock price or market value, this is called cheap, which means that the future market value will be much higher than the current market value. It is a value investment to buy a good deal now, and the value does not necessarily have to be performance growth. Three years ago, I bought a Hong Kong stock with a low price-to-earnings ratio and not much growth. Although the Hong Kong stock market has fallen sharply in the past three years, it has hit a new high because it is valuable according to DCF estimates.

China Fund News: The market has risen sharply recently, how do you understand this round of policies and the market outlook?

Zhou Weiwen: A series of recent economic policies are aimed at stabilizing asset prices and supporting people's livelihoods. Stabilizing asset prices is to promote the prices of major social assets such as real estate, stock market, and equity market to stop falling, stabilize or even rise. The recent policy is to break the negative cycle, bring the economy and asset prices back to normal fundamentals, and even achieve a positive cycle of the economy and asset prices to a certain extent. Supporting people's livelihood is to support individuals and enterprises in difficulty, helping them maintain a basic standard of living and tide over difficulties.

After the recent rally, the stock market is returning to a reasonable point. In the future, the implementation of relevant policies and the promotion of some incremental policies may bid farewell to the bear market of the past three years, which may be a new starting point. Considering that the stock market has been falling for more than three years, as well as various factors such as investors' low allocation to A-shares and H-shares, it cannot be ruled out that the stock market will rise more than expected in stages.

In terms of investment direction, two directions that may generate excess returns in the future are worth paying attention to: one is the industry with an upward business trend this year and next year, the prosperity of these industries is upward, and the pricing in the past bear market process is not sufficient, and after the bear market mentality is over, such stocks still have room to rise; In the past, it involved the "trade-in" of household appliances and automobiles, and in the future, it will also involve low-end consumption and services, essential consumption and service industries benefiting from basic people's livelihood security, pension and childbirth. In addition, the industries worth paying attention to include those that benefit from the incremental policy of promoting the real estate market to stop falling and stabilize, and the related industries that benefit from boosting the capital market and bidding farewell to the bear market.

In-depth research + investment research integration

Create a Sino-European investment and research culture

China Fund News: How does CEIBS Fund practice the concept of long-term value investment?

Zhou Weiwen: On the one hand, it is in-depth research, and on the other hand, it is the integration of investment and research.

In the process of in-depth research, I put forward the concept of point, line, surface and body, the point represents the listed company, the line is the industry, the surface is the macro, and the body is the system and society. In the early stage of entering the industry, it is easy to think that the problems of listed companies are unique, but in fact, these problems are often common to the industry, so to study a company in depth, you must first study the industry in which it is located, and the trend of the industry is closely related to the upstream and downstream and the macro environment.

Researchers need to expand in breadth and depth, which requires collaboration. In-depth research includes not only the company itself, but also the industry and macro level. For example, if a product is to be exported to Russia, it needs to pay attention to the international situation such as the Russia-Ukraine conflict. Studying a company requires extensive knowledge, and it is impossible for one person to study so many fields at the same time, so there is a need for division of labor and cooperation. With a division of labor, everyone can dig deeper and quickly summarize the main points to share with the team. In addition, it is necessary to make full use of digital tools and artificial intelligence to improve work efficiency.

Long-term trends are difficult to predict and require long-term accumulation and a deep understanding of the macro environment. Through the statistics and study of historical data, we can reduce errors. The method of reverting to the mean once every few years may not be effective in long macro cycles, so it is necessary to have a deep understanding of society and institutions.

Periodicity is also important. Changes in policy and the macro environment can lead to inaccurate industry research and earnings forecasts for listed companies. Understanding the bottom also requires a deeper understanding of society, and the industry cannot simply be assumed to have bottomed out, as the reality may still be changing.

China Fund News: How to achieve "investment and research integration"?

Zhou Weiwen: The integration of investment and research includes key points such as concept unification, communication scene creation, cultural construction and assessment mechanism.

First of all, it is important to have a common mindset and team members to agree on a medium- to long-term approach to value investing. Ideological unification is not only a cognitive process, but also needs to be educated by the market. It is necessary to guide team members through their own experience and changes in the market, so that they can have a deeper understanding of the concept. This process is ongoing.

Second, create a good communication scenario so that team members can discuss freely on an equal footing. For example, in morning meetings and regular discussions, create "business-to-business", "one-to-many" and "face-to-face" communication scenarios to solve the problem of research output and promote communication between team members. CEIBS advocates a culture of equality, and the company adheres to the principle of equality from top to bottom.

It is worth mentioning the relationship between cognition and behavior, each person's behavior will be influenced by their personality, and even if their performance is sometimes poor, they should be willing to share their experiences. It's normal for everyone to have different ways of knowing and behaving. Debates and differences of opinion should be tolerated within the company, and team members should be open and honest with each other.

Third, the assessment mechanism should be combined with teamwork, and the collaboration and culture construction of the investment research team is the key to ensure the efficient and accurate implementation of investment decisions. Establish clear rules and processes for teamwork to ensure that each member can use their expertise in the investment research process, while communicating and collaborating effectively with other members. Keep a record of each member's contribution and motivate them accordingly.

Fourth, cultivate a team culture with value investing as the core, encourage team members to establish a long-term perspective, adhere to rational analysis, and avoid the interference of short-term market fluctuations. At the same time, establish knowledge sharing platforms, such as internal databases, research forums, etc., to facilitate team members to exchange information and share experiences.

China Fund News: How does CEIBS Fund select and train fund managers?

Zhou Weiwen: As the key executor of investment decisions, the professional ability and psychological quality of fund managers have a direct impact on investment performance, so the selection and training of fund managers is an important part of team management.

In order to encourage the diversification and professional development of investment and research talents, we have launched the "CEIBS Fund Investment Research Academy" program after years of exploration and precipitation, which has the following characteristics:

The first is to provide a "investment-oriented" or "research-oriented" dual-path talent training plan, which students can choose according to their own situation. The overall planning usually covers 5~7 years of internal training, and students need to go through a complete bull and bear cycle training.

The second is to pay attention to the inheritance of internal investment and research concepts. Trainees entering the training cycle will be taught and continuously mentored by mentors such as research team leaders, research directors, senior fund managers and investment directors at each stage of growth, so as to achieve the consistent inheritance of CEIBS investment research philosophy and culture.

Third, there are strict assessment standards. From the researcher stage, it is necessary to conduct multi-dimensional assessments such as reporting ability and research contribution; If you are selected to enter the fund manager pool, you need to go through a series of strict selection and evaluation such as real performance, investment style, trading habits, and risk-return characteristics.

Seize the three major dividends of the times

China Fund News: What dividends of the times need to be grasped in the future of A-share investment?

Zhou Weiwen: Many "bull stocks" in history have benefited from the dividends of the times, and if you want to seize the dividends of the times in the future, you must first seize artificial intelligence, which is the dividend of the technological era. The second is the dividend of the reform of the A-share market. The new "National Nine Articles" put forward strict supervision, investigation and punishment of violations of laws and regulations, and the provision of dividends, which will help improve the quality of listed companies. From this point of view, there will be more opportunities for partial dividends than before. The third is the demographic dividend. There are more and more elderly people, although the pharmaceutical industry has adjusted in recent years, but in the long run, medicine is still a sunrise industry.

China Fund News: In the past two years, the performance of many cyclical industries has been different from that of the past decade. What do you think about the cyclical industry?

Zhou Weiwen: There is a cycle for the development of companies and industries. First of all, from the perspective of business laws, as long as there is a high excess return, capital will enter, but the laws that applied in the past may not be applicable in the future, so to deepen the understanding of the industry, we must pay attention to whether the company or industry creates value for the society, so that we will see farther and more neutral. Second, be imaginative about technology. When the early signs of a technological revolution are already emerging, companies cannot be analyzed according to the original logic. Finally, the longer the cycle is experienced, the more open the mind will be, and the more variable it will be everywhere, rather than constant.

China Fund News: In investment practice, how do you control drawdowns?

Zhou Weiwen: To control risk, the first step is to identify and evaluate potential investment risks, including market risk, credit risk, liquidity risk, etc. Subjectively, fund managers usually believe that the stock they choose will rise in the future, but objectively, market volatility and drawdowns are inevitable. Drawdown management is an important part of risk control to limit the loss of a portfolio in adverse market conditions. Fund managers need to recognise that everyone has the potential to make mistakes and think about how to control drawdowns.

Methods to control drawdowns vary from person to person, including industry diversification, avoiding individual stock concentration, portfolio investment, position management, hedging, stop-loss point setting, stress testing, etc., that is, by simulating extreme market conditions, evaluating the loss of the portfolio under different pressures, and taking countermeasures in advance. If the investment is too concentrated, there may be a large drawdown in a given year, even with a high probability of success.

I mainly control the drawdown from three aspects: first, adopt a diversified investment strategy; The second is to choose companies that can stand the test of time and have long-term value even in a bear market; The third is to consider the liquidity of the stock, if the underlying liquidity is too low, it is easy to generate too high impact costs when buying and selling, resulting in a large drawdown. In addition, when the market is overvalued as a whole, I will adjust my position in stages and reduce the proportion of some stocks. Overall, through these strategies, the volatility of the net value of the fund can be reduced to a certain extent and the investment experience of holders can be improved.