Recently, astute investors have observed a remarkable trend in the performance of their dividend-themed mutual funds. These funds have outpaced the average growth of the dividend sector over several trading days, which might typically prompt delighted reactions from stakeholders. However, upon closer inspection of the portfolios of these funds, it was discovered that many of them have substantial holdings in stocks associated with artificial intelligence (AI) technologies, raising questions about the authenticity of their investment strategies.

Industry experts have weighed in on the implications of these findings. They assert that any potential shift in investment style necessitates a nuanced examination. Some dividend-themed funds adopt a broad interpretation of what qualifies as a “dividend.” In addition to conventional high-yield stocks, they may include companies with promising prospects for future high dividends. If fund managers perceive that tech growth companies are on a solid growth trajectory and are likely to offer significant dividend returns in the future, this strategy could be considered justifiable. Conversely, if a fund's contract explicitly states that it will invest only in companies with a track record of consistent high dividend distributions, incorporating growth stocks could indeed signify a deviation from its original style.

Performance Discrepancies Among Dividend-Themed Products

On October 18, there was a notable rally in the equity market, with tech stocks leading the charge upwards. While the performance of the dividend sector was commendable, it could not quite match the explosive gains observed in tech indices. For instance, several of the major dividend-focused exchange-traded funds (ETFs), like the China Securities Index ETF and the Morgan Stanley S&P Hong Kong Low Volatility Dividend ETF, saw gains of less than 3%. In stark contrast, the E Fund Shanghai Stock Exchange STAR50 ETF surged by over 11%, with numerous dual-innovation thematic ETFs similarly enjoying gains in the 10% range.

Overall, the performance of dividend-themed products maintained a stable trajectory on that day, with over 85% of the funds reporting net asset value increases of no more than 3%. However, several products surged well beyond the industry average. For example, funds like the China Merchants Shekou Dividend Increased Mixed, CCB High Dividend Themed Stock, and Harvest Income Mixed posted increases of 8.66%, 5.15%, 4.79%, and 4.35% respectively. Other products such as the Greenland High Dividend Preferred Mixed A and the Pudong Development Ansheng Dividend Selected Mixed A also reported boosts exceeding 4%.

When examining longer timeframes, products that recently demonstrated significant gains are not necessarily the ones that yield consistent long-term lead positions. Data indicates that several dividend-themed funds have encountered declines exceeding 10% this year alone, while funds like the Zhongtai Dividend Value One-Year Holding Mixed Initiation fund and China Universal Dividend Preferred Flexible Configuration Mixed have seen gains surpassing 25%.

Dividend-Themed Funds and Their Tech Holdings

A deep dive into the periodic reports of these funds highlights a trend: many of them have expanded their portfolio constructions to include stocks that traditionally wouldn’t qualify as high-dividend, particularly from the tech growth sector. Taking the CCB High Dividend Themed Stock as a case study reveals that as of the end of Q2, this fund had heavily invested in stocks like Zhongji Xuchuang, Yancoal Australia, and others, including several companies in the tech space. Notably, stock such as Zhongji Xuchuang, with a 11.63% jump, contributed significantly to the fund's performance on October 18.

In comparison, the China Merchants Shekou Dividend Increased Mixed shows an even stronger inclination toward tech stocks. Its top ten holdings, as of the end of Q2, include companies such as Saiteng Co., Bawei Storage, and Xiangnan Chip, all of which fall squarely within the realm of tech innovation. The fund manager noted that sectors poised for major investment opportunities in the second half of 2024 include AI, robotics, electronics, and semiconductors, all of which are systematically supported by national economic transformation strategies.

For many investors, dividend-themed funds are expected to focus on stocks that reliably issue dividends. These stocks typically present strong dividend capabilities, supplying investors with dependable income streams. Yet, an evaluation of certain funds reveals significant investment in tech stocks with low dividend yields, which does not align with traditional expectations of steady cash flows for shareholders.

Diverse Definitions of "Dividends"

The proposed query surrounding the allocation of low-dividend tech stocks in dividend-themed funds hinges upon a myriad of interpretations. Experts believe that the matter must be addressed on a case-by-case basis. According to a researcher from the Tianxiang Fund Evaluation Center, several dividend-themed funds engage in a broad definition of dividends. These funds not only invest in conventional high-yield stocks but also consider companies with the potential for future high dividend payouts.
If fund managers believe that tech companies with growth potential can transition into high dividend payers down the line, and this strategy is articulated within the fund’s contractual documentation, then such an investment approach may not signify a shift in style. An illustration of this can be drawn from the Pudong Development Ansheng Dividend Selected Fund, which states its objective of investing in companies with stable earnings and substantial dividend potential. Similarly, the CCB Dividend Increased Mixed has also acknowledged the importance of considering future dividend prospects in its investment strategy.

Wang Yi, an investment researcher at Jinzhu Investment, highlighted the strategic advantages of merging tech and dividend-styled strategies, suggesting that tech stocks might yield long-term growth opportunities while dividend stocks serve to stabilize returns, enabling a balanced portfolio that prioritizes both growth and stable cash flows.

However, some mutual fund contracts explicitly state a focus on high dividend-distributing quality companies with reasonably estimated values. “If a fund contract clearly outlines the characteristics of investment targets, but the actual stock selections diverge completely from these predetermined criteria without a suitable explanation in their operational documentation, this can indeed indicate a notable style drift,” one public fund industry participant argued.

A Shanghai-based public fund professional described the enduring appeal of dividend-themed products as their stellar returns over prolonged periods. While these products might not outshine others in periods of rapid market growth, they often provide a reliable and robust performance over the long haul. Many investors holding dividend assets are typically more interested in slow wealth accumulation rather than quick profits. Should the yield characteristics of dividend-themed funds become unstable, it would compromise their foundational purpose, ultimately impairing the long-term investor experience.