Text | Zhu Ang

Guide:I used to interview Cao Wenjun, the fund manager of the transformation opportunity of rich countries, last year. As a researcher from the birth cycle, and later as a fund manager assistant, he has developed a top-down and bottom-up combination of investment styles from a growth fund Jinniu fund manager. Recently, we conducted another interview on the investment opportunities in the 2019 A-share market and the product review.

Cao Wenjun believes that the 2019 A-share market opportunity is bigger than 2018. Valuation and risk appetite in the three elements of stock pricing are all near historical low levels. What is not good is that the profit is facing the risk of downward adjustment. From the screening of individual stocks, he began to maintain a positive attitude towards the market, while avoiding companies with large risks of downside repair and fundamentals and macroeconomic correlation.

Cao Wenjun also divides stocks into four quadrants based on his own style: growth, value, cycle and theme. For 2019, he expects the stock allocation to be distributed in 45% value style, 45% growth style and 10% theme style, avoiding the configuration of cyclical stocks.

Finally, Cao Wenjun also talked about the most painful stage of his own fund manager. There are sometimes contradictions from top to bottom and bottom to top. When working as a fund manager, you need to think about what you have in common with your market when investing and where you are diverging. A fund manager does a very smooth or very unsatisfactory job, and all of them need to pay attention to the risks. The former means that their own perceptions have been reflected in the market, and the expected difference in the future has largely disappeared; the latter means that there is a huge disagreement between themselves and the market, and it is necessary to consider the risk points of their own thinking.

The following is the full text of our interview, I hope to help everyone!

Keyword 1: Valuation and risk appetite at the bottom of history

1. You are a top-down and bottom-up fund manager. Can you talk about your top-down view of the market?

Cao Wenjun:My own summary of the market is that it is currently in the early middle of the economic growth rate from the high level. In 2018, the economic fundamentals were actually relatively high in the first half of the year, and there was a sharp decline in the third quarter. From the perspective of economic fundamentals, it is still in a downward process.

From the perspective of the three factors affecting stocks in the secondary market, the valuation is at a very low level, and the risk appetite is at a very low level, but the adjustment of earnings expectations is not yet in place.Therefore, of the three elements of stock pricing, the two elements are relatively determined at the low level, and the space for further down is not large. In terms of earnings forecasts, we must be alert to further reductions.

Overall, for the secondary market operation, 2019 will be easier than 2018. From top-down industry and company choices, I will first choose industries that are relatively weak in macroeconomics, early cycle and policy hedging. such asreal estateInfrastructure and 5G are all industries that cover policy hedging. Another idea is to choose industries that benefit from a cost-side decline. The PPI downtrend in 2019 is a relatively certain direction.

2. Can we analyze the current situation of the specific three factors of pricing: First, let's talk about the current valuation position?

Cao Wenjun:The current valuation center is at a standard deviation level below the mean since 2000. At the top 20% of history.According to the absolute valuation level, the overall TTM valuation of A shares is near the historical low. This valuation level has only appeared twice in history. One was in the midst of the 2008 financial crisis, but the duration was short. The other is from 2012 to the beginning of 2014, when valuations were between 12 and 13 times and lasted longer.

There is a special financial background from 2012 to 2013, which is not the same as it is now. From 2010 to the first half of 2014, the entire trust scale grew rapidly, from 1 trillion in 2010 to 4 trillion in 2014. The trust products at the time had a rigid redemption feature and provided a high risk-free rate of return. In contrast, the yield of stocks as risky assets is less attractive. So high-net-worth customers at the time went to buy trust products.

However, after entering the second quarter of 2014, the growth of the entire trust product began to stagnate. There are subjective and objective factors. On the subjective factors, the bank saw that the scale of the trust was getting bigger and bigger, and there were problems, and the initiative began to adjust. On the objective side, the rigid redemption of the trust was slowly broken.

After that, a large amount of funds came out of the trust market and entered the stock market, opening a big bull market.

At present, the trust provides a yield of only about 7%, which is much lower than that at the time. Stocks are attractive from the perspective of cost performance in the comparison of large categories of assets.

Source: Wells Fargo Fund

3. Let us talk about the current risk appetite?

Cao Wenjun:We use the equity risk premium (ERP) to measure the risk preference level. The current equity risk premium is at a position that is twice the standard deviation since 2002. In other words, the risk preference is at the top 5% of the history. Such a weak risk appetite has appeared once in the fourth quarter of 2008, once in the end of 2011, and the rest is now. From the perspective of risk appetite, it is the end. There is no further systematic risk spread behind, and it is currently near extremes.

Source: Wells Fargo Fund


        Keyword 2: Inadequate profit adjustment

4. We finally talked about profit, do you think the profit adjustment is not enough?

Cao Wenjun:This is a fly in the ointment. The adjustment of earnings expectations is not sufficient. The profitability began to deteriorate, which started in the third quarter. The profitability of many industries has not really begun to decline. For example, in most heavy chemical industries, the profit level is still high. The middle and lower reaches have already begun.

Two industries are very representative in 2018. One is industrial automationrobotOntology, the industry grew by 35% in the first five months of last year, but it began to decline sharply in June. It started to grow negatively in September, and it was negative every month in the fourth quarter. In 2017, the industry growth rate is still 60%. This history rarely appears. The order cycle in this industry is relatively short and the adjustment is very fast. The expectations are not good, and the order will be gone. The second is liquor, which was also very strong in the first half of last year. Until June-July, the overall supply relationship is still biased. By September and October, the third quarterly report was revealed, and the second-high demand was obviously weakened. Later, we saw that the demand for high-end and sub-high-end liquor could not be sustained. Liquor is a typical post-cycle industry. Historically, the demand for the economy to start to pass down to the liquor industry has generally weakened. It usually takes two to three quarters, but the cycle of this cycle is very fast, reflecting the rapid decline in consumer confidence.

From a variety of clues, corporate confidence, consumer confidence, etc. have seen a major decline in financial deleveraging and external issues.

Although the policy has already turned after October 2018, I have to wait for the improvement of the overall data in 2019, including the total amount of social financing and the growth of M2. There are two major differences between the current economy and the previous one.

First, the global environment is not an adjustment of the simple inventory cycle, but a stage in which a big boom booms and the end begins.In this case, the downward force of the cycle will be relatively large.

Second, the means of domestic policy hedging can be used much less than before.. I judge that the policy will be hedged and the intensity is very difficult. The end result is that you can change the speed down, but you can't change direction.

Based on the above judgments, I will try to find companies with low economic relevance from top to bottom. When the profit forecast is adjusted downward, the risk will be smaller.

5. From the perspective of cheap valuation and profit certainty, which dimension of your stock selection will be more preferred?

Cao Wenjun:I still look for profit certainty first. A company with a low price may be a valuation trap. If the profit forecast is kept down, these companies may not be really cheap, but everyone's profit forecast is wrong. Especially in the business model, companies with heavy assets and high operating leverage. The downside risks of these companies are not only the problem of revenue side, but as the supply relationship of the industry changes, the gross profit margin will be significantly revised down. Historically, these industries are not suitable for the left side and are suitable for the right side. If you do the left side, if the judgment error is in 2 quarters, it is possible that the profit impact is more than the security pad of the valuation protection.

      Keyword 3: Market opportunities outweigh risks

6. Overall, although the economy is facing continued downside risks in 2019, valuations and risk appetite are low, and most of the unfavorable factors are included in the price. So in 2019, do you think the capital market will perform better than 2018?

Cao Wenjun:The environment in 2019 is much better than in 2018. From the general perspective, the overall wealth stock of the Chinese market is sufficient, the funds are not lacking, and the lack of good assets. Banking financial yields are now much lower than a year ago.Monetary FundThe rate of return is much lower than last year. In the third quarter of last year, after the online loan P2P thunder, many funds returned to the bank's financial channels.

The stock market is still lacking in money-making effects and there are no particularly good assets. I recently looked at two indicators. One is the fund's current new issuance indicator. At present, this position is similar to that of 2012 to 2013, and it is in the past 10 years. The other one isShanghai and Shenzhen 300The weekly turnover rate indicator is currently the lowest 1% level since 2004.

Source of quantity: Wells Fargo Fund

At the bottom of each market, fund products are sold very poorly, and investors are not changing hands. From these two data, the current market is also in a safe area, this position invests in the secondary market stock-type products, and high-probability investors will make money.

Keyword 4: Targeting continuous excess returns

7. As a fund manager, what is your investment goal?

Cao Wenjun:Summarize my investment goals in one sentence: continuous Alpha. A sustained Alpha is obtained while maintaining the stability of the combination relatively high. I don't want to excel in the staged rankings, the overall portfolio stability, considering the first place. Under this premise, continue to accumulate Alpha.

From the bottom up, I mainly consider the combination of stock selection and risk control, including liquidity management. I divide the stock into three categories. The first category is the core strategic variety, and the position weight is more than 5%. The second category is the configuration type, the position weight is more than 3-5%; the third category is the elastic variety, the position The weight is between 1-3%.

My portfolio positions are generally 30-40 stocks, of which 3-5 core strategic varieties, these companies need top-down big logic and bottom-up excellent texture, can provide risk-adjusted benefits, is a combination cornerstone. There are more configuration types, and the logic from top to bottom is more fluent, but there are some small flaws from the bottom up. Some companies have poor matching, and not all businesses match big logic. There are also some companies that have a good match, but the management ability is not good enough. Others are elastic varieties. These varieties generally have a small market capitalization and a strong theme. In the bull market, beta is relatively large, but the margin of safety is relatively weak. Elastic variety I use as a combined beta regulator.

From the logic of stock selection, it is the first pass to make risk indicators and liquidity management of stock selection. At this time, while pursuing Alpha, understand where to expose risks.

Up to now, the market in 2019 is relatively low to medium risk preference. Valuation and risk appetite, these two dimensions, have some compensation for the expected improvement in earnings.However, before the economy is clear enough to see the end of the bottom, the overall stability and risk control are placed in a more important position.

Keyword 5: Risk control, know how to correct

8. How do you carry out the combined risk management of this new product?

Cao Wenjun:The quality growth of the rich countries that I will issue next will be done in accordance with the CPPI strategy, providing absolute benefits with a class-guaranteed thinking. There are several important assumptions in the product setup that set the retracement target based on the length of time. According to the current market atmosphere and the low risk preference of customers, the new product withdrawal rate is controlled within 2% in the first half of the year.

Our approach is to obtain absolute returns and control risks based on the combination of risky and risk-free assets. Risk assets are mainly equity assets, and risk-free assets are financial assets. The single stock stop loss line is set at 10%. How many safety mats do you have, and how much can you adjust to your equity position? During the period of opening a position, the equity position cannot exceed 20%. After the end of the opening period, the lower limit of the equity position is 45%.

From the perspective of the overall combination, my approach is the same as before. There is a big strategic judgment from top to bottom, there is a big base above, for classification. Under different macro backgrounds, the shrinking of valuations ultimately reflects different investment styles. The value style is short-term, low-risk exposure, and is more suitable for a bear market or a market with tight liquidity. The theme is long-term, high-risk exposure, more suitable for the second half of the bull market.

Source: Wells Fargo Fund

9. Can you talk about how to prepare for the future in your four growth quadrants: growth, value, theme and cycle?

Cao Wenjun:My configuration in the four quadrants in 2019 was: 45% value, 45% growth, 10% theme. Values ​​are selected to favor low-risk, low-yield returns. Growth will choose a relatively aggressive variety. There are a lot of stocks now, which are still at a low valuation compared with history, and endogenous growth is also relatively strong.

In terms of liquidity in 2019, my judgment is definitely better than that in 2018, but it is unlikely that there will be an outbreak of liquidity at the end of 2014. So the theme environment will be better than last year, but the overall environment can only participate moderately.

10. Last question, I want to ask you what is the most painful experience in making an investment. How was it overcome at the time?

Cao Wenjun:My most painful experience was in the fourth quarter of 2014, which has something to do with my investment approach. I am a combination of top-down and bottom-up, sometimes there are certain contradictions. Pure top-down or bottom-up has its own benefits.

Pure bottom-up is to believe that the time dimension is elongated, and the entire inventory process is the mean return. Investors just need to focus on the good companies in the industry and grab Alpha. The big environment can always be done as long as it is not devastating.

Pure top-down, you can completely dilute stock picking, and seize the macro and industry Beta. For example, when the supply side reforms, it buys a group of companies that are relatively similar in terms of coal and steel. It is enough for investors to maximize their exposure to the industry.

Both methods have their own obsessions. One is the obsession with the company, and the other is the obsession with the short-term Beta. Putting him together, sometimes there will be contradictions.

In October 2014, my performance was still one-third of the former market. After receiving a large-scale fund, I continued to buy a number of small-cap stocks. At that time, there was no excessive consideration of the changes in top-down liquidity. However, in the last two months, there has been a surge in large-cap stocks, and the situation in which small-cap stocks have plummeted has had a greater impact on me.

One of my mentor once told me thatBe careful when you are investing particularly well, or if you are particularly uncomfortable.Especially not good, indicating that your differences with the market is very big. At this time, you have to figure out where the differences are, how confident you are that you are right. When it is particularly smooth, it means that everyone is thinking in your direction. At this time, you have to be careful. With the realization of the income, is there any expected difference in the future? In your understanding, where else can you surpass the market? Or you just enjoy the Beta of the market.

Whether it is good or bad. There are still quite a lot of challenges for myself. This methodology is not like your programming. The active equity component is still relatively large. You have to tie the bottom-up logic to the top-down logic, otherwise it will be out of touch. At each stage, it is best to match.