Insights

In a return focused world, we like to categorise ourselves as risk-focused investors. Indeed, we run our affairs with the motto that we would rather lose our clients than take undue risks. In that vein, we have taken a conscious decision not to invest in Chinese businesses. It is a decision that we have discussed with our investors, personally as well as via our Q1 2021 investor letter. As we have highlighted, we have been wary of the risks that these businesses present to investment portfolios.

Earlier in the year, China introduced various restrictive regulatory policies aimed at curbing the influence of its technology companies and entrepreneurs. The result has been significant losses for investors. The regulatory crackdown has wiped out an estimated USD 1.5 trillion in market value for Chinese technology stocks.

The chart below shows the performance of some of these Chinese businesses since February 2021. As is seen, most of them are down 30 to 50% since their February peaks. TAL Education Group, a Chinese EdTech company, is down nearly 95%. In the process, it lost nearly USD 50 billion in market capitalisation.

Our decision to stay away from China-based businesses has allowed us to side-step the troubles that have transpired in the recent past. Earlier, as the year 2021 was starting up, we had a conversation with a Wall Street Strategist. He expressed his concern that such a stance may result in meaningful underperformance if Chinese stocks took off. We thought about the issue and concluded that if we do underperform in such a scenario, that would be acceptable.

Thus far, that decision has served us well. However, there will come a time when these stocks will stop going down and will possibly outperform. Keep in mind that just as we haven’t participated in the downside, we won’t be participating in the upside either.