Summary of Key Points
In the second quarter of 2026, A-share active funds exhibited extreme concentration on the technology sector (with electronics and communications accounting for 60% of their portfolios), leading to the emergence of 144 funds that doubled in value. However, in July, the technology sector experienced a significant pullback, causing these funds to average a 27% decline, leaving only 8 funds remaining at their initial level. In response to the market volatility, institutional investors showed divergence in strategy: some reduced their holdings in advance to avoid risks, while others, whose performance had been weak in consumer and pharmaceutical sectors, were forced to shift their focus to technology.
The current debate in the market revolves around the future opportunities and risks associated with the technology sector. Most experts agree that it is necessary to return to focusing on industry trends and adopt a more balanced investment strategy.
How Extreme was the Concentration on Technology in the First Two Quarters?
Fund managers in the second quarter placed nearly all their bets on the technology sector:
- Extreme Portfolio Concentration: Active funds allocated as much as 60% of their portfolios to electronics and communications, the highest proportion ever for a single sector.
- Major Changes in Heavyweight Stocks: Nine of the top ten heavyweight stocks in public funds were technology companies (such as Zhongji Xuchuang and Cambricon). Former market leaders like Kweichow Moutai and pharmaceutical giant WuXi AppTec dropped out of the top ten; 23 of the top thirty heavyweight stocks were technology-related, accounting for 77% of the total portfolio.
- Volatile Returns: This aggressive strategy led to 144 funds doubling in value, but it also exposed them to significant risks—after all, "putting all your eggs in one basket" can result in a complete loss if that basket falls.
How Severe was the Tech Pullback in July?
The technology sector's sudden decline in July wiped out the gains made earlier:
- Sharp Stock Drops: The top thirty technology stocks in public funds experienced an average decline of over 13%, with ZhaoYi Innovation (held by 1,313 funds) plummeting by 46% in a single month.
- Massive Losses for Doubling Funds: Of the 199 funds that had doubled in value in the first half of the year, 75% lost more than 26.9% in July; some, like Dongwu Value Growth A, which had gained 158% earlier, saw their returns drop by 44% in just one month, leaving them with only 43.5% of their initial value. As a result, only 8 funds from the "doubling club" remained.
Institutional Responses to the Volatility:
Investors took different actions:
- Early Exit Strategy: Some funds reduced their holdings to mitigate risks; for example, E Fund Industry Opportunities A decreased its stock portfolio from 92% to 80%, resulting in a mere 8.4% decline in July, one of the lowest losses among the doubling funds.
- Shift to Other Sectors: Funds with poor performance in consumer and pharmaceutical sectors were forced to diversify into technology. For instance, Zhang Kun's E Fund Blue Chip Selection reduced its holdings of Luzhou Laojiao and Wuliangye by more than 50% and added stocks in the semiconductor industry. Liu Yanchun's Jingshun Great Wall Dingyi completely removed Kweichow Moutai and Mindray Medical from its portfolio after holding them for several quarters, replacing them with semiconductor and communications stocks.
The Future of Technology: Opportunity or Risk?
There is no consensus among market participants regarding the technology sector's prospects:
- Optimists: They believe that the high level of concentration has been reduced, and the key lies in following industry trends. Zhang Qiyao from Industrial Securities suggests waiting for clearer signals, such as U.S. corporate earnings reports and domestic policy meetings, to determine the direction.
- Cautions: Others warn about potential bubbles and emphasize the importance of valuations. Fund manager Nong Bingli warns that high expectations within the technology sector could lead to greater volatility, and profits must align with valuations. Xie Zhiyu points out that current high valuations for AI-related sectors are risky and unsustainable.
- Moderates: While still optimistic about the long-term potential of technology, most managers advocate for a balanced approach. They recognize technology as a key trend but suggest diversifying investments.
The Way Forward: Balanced Allocation is Key
The market has learned from this experience that extreme concentration carries significant risks. The consensus now is that a more balanced investment strategy is safer.
- New Focus: Fund managers are looking for opportunities in other sectors with lower valuations and improving fundamentals, as well as in areas driven by AI (such as upstream materials and equipment).
- For Investors: Avoid chasing funds that have doubled in value; the lesson here is that extreme returns often come with extreme risks. Diversified investments and a focus on balanced funds may provide more stability.
In summary, the "track-based" investment strategy in A-share markets continues, but the approach has changed. The shift from aggressive betting to a more balanced allocation reflects a new understanding of market dynamics. This volatility may serve as a reminder for all investors to reconsider their investment approaches.