A New York-based emerging markets equities fund that has outperformed most of its peers has been adding to its Chinese stock holdings in recent months, as it deemed this year’s relentless selling to be overdone.

Pzena Emerging Markets Value Fund boosted the weighting of China and Hong Kong stocks to around 33% of its portfolio in the third quarter, up about four to five percentage points, according to a Bloomberg Intelligence note. That compares to 29% in MSCI Inc.’s gauge of EMs.

“The indiscriminate selling of Chinese stocks has increased the value opportunity,” Allison Fisch, a money manager at the $1.5 billion fund, said in an email. “We’ve been taking advantage by buying up companies we believe are exceptionally cheap relative to their normalized earnings power.” 

The fund is the latest example of some money managers’ buying Chinese stocks on a tactical basis as policymakers increasingly pursue measures to loosen liquidity and restore consumers’ confidence in a faltering economy. The MSCI China Index is down more than 14% this year, losing more than half of its market value from a peak in 2021.

The index is trading at 10.2 times its 12-month forward earnings, lower than its five-year average of 13.5 times, according to data compiled by Bloomberg.

Pzena added commercial lender China Merchants Bank Co. and WH Group Ltd., one of the world’s largest pork companies, to its portfolio in the third quarter. In a sign of the weakening economy, prices of the meat, a Chinese staple, have fallen to their lowest since April 2022. Investors have also shunned banks on concern they will be saddled with bad loans.

Pzena’s decision to turn overweight goes against the consensus, with exposure by the top 100 EM funds to China and Hong Kong falling to the lowest level in five years in the third quarter, according to the BI report, written by Marvin Chen and Sufianti. Overseas investors are on course to extend their record selling streak in mainland equities to a fifth month. 

Fisch’s fund, which she runs jointly with Rakesh Bordia, Caroline Cai and Akhil Subramanian, has outperformed 97% of its peers over the last three years, according to Bloomberg-compiled data. Pzena Investment Management says it managed about $56.4 billion of assets invested worldwide as of Sept. 30, 2023.

Many of Pzena’s Chinese holdings were companies that have sizable foreign revenues, including components maker Weichai Power Co. and home appliance maker Haier Smart Home Co., Fisch said. Alibaba Group Holding Ltd. and China Overseas Land & Investment Ltd. also feature among the fund’s top 10 holdings.

China still has quality businesses with massive scale, Fisch said. “We don’t believe these companies should be overlooked,” she said.

This article was provided by Bloomberg News.