High valuations in sector and thematic stocks, public funds turn their focus to undervalued and stable assets

Securities Times Reporter An Zhongwen

In the context of popular sectors and crowded stocks gradually facing valuation pressures, public fund allocation strategies are shifting from sector beta trends to alpha.

As market profit effects emerge, crowded stocks are now facing performance tests after high valuations. Fund preferences are shifting from industry stories to actual performance, with the beta trend driven by sectors and themes gradually receding. Many fund managers are beginning to avoid high-position crowded stocks and instead focus on uncovering alpha in undervalued, low-coverage stocks with solid fundamentals.

Fund Thematic Investments Boost Valuations

Since the beginning of this year, active equity funds have continued to show strong profit effects. Leveraging high-growth and high-elasticity tech stocks, public offerings have generally achieved good returns early in the year. Wind data shows that in less than three months, the top ten active equity funds have returns between 30% and 60%. Among them, Western Lide Fund ranks in the top three for active equity performance, with Western Lide New Power returning about 58% year-to-date, Western Lide Strategic Selection about 57%, and Western Lide Industry Themes about 52%. Other public funds include GF Vision Smart Choice Fund with about 51%, Ping An Xin’an Hybrid around 45%, and Yin Hua Tongli Select Fund approximately 44%.

While performance has been impressive, many heavily held stocks in these products show signs of institutional crowding and high valuations. An analysis of the top 30 market-leading funds indicates significant homogeneity in their holdings—most hold similar stocks, with little variation in product features or preferences. Industry insiders believe that once public fund sentiment or crowding expectations adjust slightly, it could trigger sharp stock price fluctuations, impacting fund net value stability.

Additionally, focusing on hot themes and thematic investments has been key to generating returns for many funds. However, emotion-driven thematic investments, after a significant valuation increase, expose risks quickly.

The Securities Times notes that many funds’ crowded stocks are becoming conceptual or thematic, with stock prices soaring without fundamental support. For example, Wanze Co., a traditional pharmaceutical company specializing in gut probiotics, has become a commercial space concept stock due to its high-temperature alloy business, accounting for about 21% of revenue, and is heavily held by several large public funds. Wanze’s stock price has doubled this year, with a market cap recently surpassing 20 billion yuan, outpacing some A-share companies specializing in high-temperature alloys.

Public Funds Turning to Undervalued Stocks

Recently, public fund research and holdings also reflect a shift from beta to alpha strategies.

The Securities Times notes that relatively stable, moderate-elasticity stocks have become key research targets for many fund companies. For example, GF Fund researched Haixin Food on March 11; Nuoya Fund researched Fuhui Jia on the same day; Penghua Fund researched small appliance leader Whirlpool on March 10; Rongtong Fund researched Xiangpiaopiao on March 4; and Penghua, Ping An, and Huashang Funds have researched companies like Adit and Hars. These companies are generally consumer sector stocks with low institutional crowding and less market attention.

Take Adit, a leader in oral medical aesthetic materials, as an example. By the end of December 2025, only two active equity funds had included it among their top ten holdings. Its low institutional attention might actually be a trigger for stock price increases. Since the start of 2026, amid increased volatility in tech stocks, Adit has shown an independent upward trend, with its stock price rising 103% in less than three months.

Similar situations are seen in several undervalued Hong Kong stocks, including Jiangnan Buyi, Quanfeng Holdings, IFBH, Bruker, and Dashi Shares. These stocks generally have low institutional holdings or are at the bottom of industry cycles, leading to extreme valuation compression. Some high-quality stocks are only in the top ten holdings of a single fund. For example, by the end of 2025, only one mini product under Green Fund held Quanfeng Holdings, a leader in electric lawnmowers; Dashi Shares, which has expanded its pizza stores, is only in the top ten holdings of one Penghua Fund; and IFBH, a newcomer in coconut water, has only a few funds tentatively holding it.

A GF Fund representative said, “Funds should avoid chasing high valuations in overheated markets, but also shouldn’t hesitate during market downturns or at the cycle bottom. Only by detaching from emotional influences and thoroughly researching industry logic, cycles, and company value can they seize quality opportunities.”

Fund Managers Focus on Stock Alpha

In the face of increasing difficulty in industry theme investing, many public fund professionals emphasize strengthening stock-specific alpha strategies in 2026.

Ping An Asset Management investment manager Che Qiang stated at the Ping An Fund’s 2026 strategy meeting that stock investment in 2026 should focus more on fundamentals-driven stock opportunities. The beta trend of recent years may gradually fade, making capturing alpha more critical. Increasing global uncertainties are elevating market risk premiums, which will put pressure on valuations of high-elasticity stocks lacking earnings support.

Great Wall Quality Growth Fund manager Zhang Jian believes that stock selection in 2026 should prioritize attractive, undervalued, and stable stocks. He predicts that rising crude oil prices and concerns over inflation expectations may reduce risk appetite. Looking at the year ahead, he favors: 1) low-valuation, stable stocks across industries. The rapid development of AI and geopolitical conflicts overseas have increased asset volatility, but undervalued, stable assets with slow or slightly declining growth still have high long-term return potential. 2) Domestic consumption. Under economic recovery, some leading companies show resilience and even growth potential; cost reduction and efficiency improvements could further strengthen their fundamentals.

“Now is the time to abandon generalized AI concept plays and focus on performance certainty and industry resilience,” said Wei Fengchun, chief economist and fund manager at Chuangjin Hexin Fund. He believes that the differentiation among tech stocks will deepen. Companies with full-stack AI deployment and energy-efficient enterprises will continue to benefit from technological cycles and industry upgrades, while high-energy-consuming, unprofitable, and core-technology-lacking stocks will be gradually phased out. High-quality tech companies with core technologies and sustained earnings will become the focus of long-term capital allocation.