Thoughts on my portfolio (Aug 21)

There comes a point when I stopped tracking the stock prices of the stocks in my portfolio. Nevertheless, since the world is so connected, and news spread instantaneously, I can almost feel the volatility daily.

Probably the biggest impact to my portfolio these days comes from the below news.

China Tech Rout Deepens as New Regulations Mulled; Alibaba Dives (read here)

Chinese Tech Stock Selloff Deepens (read here)

Although I am still bullish when it comes to the Chinese Tech stock sell-off, news emerging do make me ponder.

SEC Warns US Investors About Risks Of Buying Chinese Stocks As Crackdown In Beijing Continues (read here)

To quote the above article: “The reason is that under Chinese law, foreign ownership in certain (most) Chinese industries is prohibited. As a result, it is illegal for Chinese companies like JD.com and Alibaba to have any non-Chinese shareholders……

So, a structure was developed to circumvent Chinese law: the VIE (Variable Interest Entity). This is a structure that has been around for decades, first popularized here in the US by Enron to obfuscate assets and liabilities on its balance sheet (there is the first alarm bell…).

The VIE structure achieves the dual purpose of giving Chinese companies access to Western capital, whilst simultaneously allowing Western investors access to Chinese stocks. It does so by effectively saying two different things to each side: the VIE says to the Chinese regulator that the company in question is wholly owned by Chinese nationals, while the same VIE simultaneously tells the Western shareholders that they legitimately own that Chinese company.”

So there have been questions as to what we, foreign retail investors are actually investing in when we buy shares of Chinese companies listed in the US stock markets. Are we (the retail investors) actually owning small fractions of these growth companies?

In fact, it also raises the question as to what we are actually investing in when we invest in the shares of the Chinese companies listed in the Hong Kong stock market (or Singapore stock market, etc), since “foreign ownership in certain (most) Chinese industries is prohibited.

To quote the below article: “As China reasserts control over its powerful private enterprises, US and Hong Kong investors in Chinese stocks need to be aware of a rarely discussed risk that has the potential to jeopardise their holdings: the fact that they do not technically own the companies.”

Legally ambiguous ‘VIE’ structure means foreign investors don’t technically own overseas-listed Chinese stocks – and that could spell disaster (read here)

To quote the below article: “Overseas-listed Chinese companies, from Alibaba (BABA US) to Tencent (700 HK), Didi (DIDI US), and New Oriental EDU+0.6% (EDU US), are almost all proxy vehicles for Mainland businesses, established in Caymans, BVI, Seychelles, Bermuda, and elsewhere. A revocation of the rights of Variable Interest Entities (VIEs) would instantly destroy these companies and with them, China’s internet and tech sectors.”

Will The VIE Structure Die? What Hong Kong And Alibaba Have In Common (read here)

Listing PRC Companies in Hong Kong Using VIE Structures (read here)

The above question (what we are actually investing in) is so fundamental to me as an investor, that sad to say, I don’t even think about it. I paid good money, of course I expect to own something, and what’s more with many tech stocks I don’t even get dividend payouts. Imagine if Alibaba the stock turns out to be a scam (or any other Chinese tech stocks).. the worldwide impact would be huge.

Reminds me of the CLOB saga (read here).

I found the below extract from the latest Alibaba annual report, I reckon the key words in the passage below would be “great uncertainties”. And generally investors do not like uncertainties (much less great uncertainties).

As I watched the once multi-bagger stock in my portfolio (at one time a two-bagger in my portfolio) dropped to the recent lows, and at the point of writing this post, reaching a negative unrealised loss of approx. 30%, it reminds me again how quickly tides can change in the stock market. The stock is the US listed Pinduoduo (PDD).

This Is Fine Life Rn GIF - This Is Fine Life Rn Life Right Now GIFs

The other Chinese tech stock which I have in my portfolio is Alibaba (9988.HK), listed on the Hong Kong exchange. It is also underwater (at around -25%).

US listed tech stocks (like PDD) have another set of worries, beside the fact that Chinese regulators are reining in many of its biggest technology companies. Under a law passed under the Trump administration in December, Chinese companies may face delisting if they refuse to hand over financial information to American regulators. (read here)

I am sure if they are delisted in the US markets, their HK listed entities will feel the heat too (in terms of share prices).

Again there are the bulls and the bears pertaining to the above-mentioned law and potential delisting.

Charlie Munger for one, seems unperturbed by the above news. Earlier this year (2021), the Daily Journal which counts the billionaire investor Charlie Munger as its chairman and portfolio manager, acquired 165,320 shares in Chinese e-commerce and tech giant Alibaba Group (NYSE:BABA). According to the company’s latest 13F filing, this holding made up 17.6% of the equity portfolio at the end of June 2021. It was worth $37.5 million.

Has Charlie Munger Made a Mistake With Alibaba? (read here)

To quote the above article: “This raises a question mark over all VIEs, including Alibaba. If Chinese regulators take the ban further and extend it to All New York-listed businesses, it’s unclear what, if anything, would remain for shareholders. Are regulators just making their presence known, or will they really begin to limit foreign direct listings? While access to foreign capital can help companies get off the ground, it can later come back to bite a country if foreign investors reap the majority of the benefits from their business growth, so it is currently unclear which option would be more beneficial in the eyes of Chinese regulators.

Has Munger made a mistake?

Considering the above, I think it’s reasonable to ask if Munger has made a mistake with Alibaba. The company’s fortunes, at least from the perspective of a shareholder in the U.S. listing, are unlikely to be affected by this disruption.”

No doubt it is just a small amount when we take it in consideration to the overall net wealth of Charlie Munger, but still, I am rather surprised by his move. In addition, we all know how low key Charlie is when it comes to his investing moves, he rarely shares his thoughts behind the trades.

On the other end of the spectrum, there is a the often read (recent) news of Ark ETF’s Cathie Wood dumping Chinese stocks last month (July 21), as Beijing’s clampdown wiped out about US$1 trillion in onshore, Hong Kong and US markets.

Ark ETF’s Cathie Wood keeps ‘open mind’ on China shares after dumping them in July sell-off (read here)

Cathie Wood’s ARK Invest Didn’t Dump All Chinese Stocks. Here’s What It Still Owns. (read here)

While I am still very much a bull when it comes to the sell-off in Chinese stocks and see this as an opportunity to purchase more, I have to add that my current Chinese tech stocks holding occupies only a small percentage of my overall stock and bond portfolio.

In fact, Alibaba (9988) and Pinduoduo (PDD) account for only 1.54% and 0.88% of my total stock and bond holdings. I reckon this percentage would have been higher in better times (even though I have added to my holdings after their stock prices have gone south further).

I do know that no matter how bullish I am, I could still be wrong. I have been wrong, and will be wrong (again) at some point.

Put it in another way, my thinking would be very different if majority of my net worth is invested in Chinese Tech stocks or any of the Chinese Tech ETF (iShares Hang Seng TECH ETF, Lion-OCBC Securities Hang Seng TECH ETF, or KraneShares CSI China Internet ETF, etc). My risk tolerance would be much lesser. There are always factors beyond my control no matter how much conviction I have in Chinese Tech stocks. No doubt, fundamentally the growth of many of these Chinese Tech companies are still spectacular. However, adding more investment money does not change the narratives.

The stock market is in the words of John Maynard Keynes, a Keynesian beauty contest. The effects of sentiments is amplified many times. People looking over others’ shoulders guessing what their next moves will be and acting onto it before others do. Predicting moves is meaningless. Moreover, this Chinese regulatory intervention would probably take much longer… My take is probably just accept this ‘amplification’ or over-reaction, not sure how long it will last. From time to time, take advantage of it (hopefully it lasts longer, as I only do monthly DCA).

I lumped these 2 Chinese tech stocks (Alibaba and Pinduoduo) under my Story Fund portfolio. The other stocks in the Story Fund consist of Alphabet, MasterCard and The Trade Desk. So in a way, the unrealised losses in the Chinese Tech stocks are mitigated by the unrealized gains in the US listed Tech stocks. In fact Alphabet is a two bagger in my portfolio.

Still overall, the Chinese regulatory actions on Chinese Techs, the private education industry and the property sector has an adverse effect on many of the HK listed stocks in my portfolio. I would say overall, it is a mixed bag, as most of the stocks in my Hong Kong dividend portfolio are REITs, property counters, bank stocks and consumer staples stocks. Overall, if we look at the indices, the HSI and STI have generally lagged behind the S&P500 and Nasdaq.

I believe that it is important to having a diversified portfolio.

So in general, not one single stock occupy more than 15% of the total value of my portfolio. See below chart for the percentage breakdown of the different segments of my portfolio. Nevertheless, my portfolio is more skewed towards dividend income stocks.

On a macro level, the dismal performance in the HK portfolio is mitigated by the better performance in the Sg portfolio.

One interesting occurrence that actually happened in my portfolio, is that the ‘elephants’ turned out to be the better performers this time round… “Elephants do fly”.

With the local banks restoring back their dividend payouts, and Singapore slowly re-opening and overseas travel slowly being made possible (via vaccinated travel lanes), some of the better performing stocks for now are in the local listed companies. And of course the US listed growth companies.

Among the better performers in my portfolio, would be Alphabet, DBS and ParkwayLife Reit.

Most importantly, despite the ups and downs of the stocks prices, my dividend income machine has continued to trend upwards despite me not adding much to it. After all, my recent DCA buys are in Chinese Tech stocks which don’t really contribute much in terms of dividend.

The recent August 21 dividend record shows that it has surpassed the amount paid in August last year. BTW the Sept to Dec 21 amount would change (and likely increase) as more companies announce their dividend payouts in the coming months.

The overall projected dividend payout for year 2021 is on track to surpass the dividend amount received in 2020. Hope this trend continues in 2022.

For the Sept 21 DCA, I look forward to increasing my holdings in more dividend income stocks.


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About apenquotes

Born in 1976. Married with 2 kids (a boy and a girl). A typical Singaporean living in a 4 room HDB flat. Check out my Facebook Page: https://www.facebook.com/apenquotes.tte.9?ref=bookmarks
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