When Shanghai stocks plunged the most in eight years on Monday, Huey-yuan Yang was buying.

And he’ll be buying next time, too -- confident that Chinese policy makers are prepared to prop up the market after big down days.

“I see buying-on-dip opportunities amid abnormal declines,” said Yang, who manages the equivalent of $169 million for the HSBC China A-Share Focused Fund in Taiwan. The fund beat 93 percent of peers over the past year with a 58 percent return. “The recent sell off didn’t change my view.”

Yang is one of eight fund managers in the Greater China region surveyed by Bloomberg who plan to increase holdings of the nation’s yuan-denominated shares this year. In the poll of 13 firms, which oversee a combined $51 billion, the other five said they’ll maintain holdings.

David Fuller's view

That is all very well but it depends on what their unit holders do.  Buy Low, Sell High is a commonsense strategy that usually works for investors.  However, in funds it can be reversed, seldom due to the managers’ wishes but in response the decisions of investors in the fund.  In this version of the tail wagging the dog, investment managers can find themselves under pressure to buy more in a strongly rising market because investors are throwing money at them.  If they do not invest the new cash in a rising market they will underperform, to the consternation of their investors and possibly their employers.

Conversely, in a falling market prudent managers may wish to buy because cheaper valuations are on offer.  However, if their unit holders are disillusioned and cashing out in large numbers, managers may find themselves forced into a Sell Low, Buy High policy which becomes self-feeding.  This is why active markets can easily overshoot in both directions.  The presence of tracker funds makes this even more likely.   

In the case of , mentioned in the article above, the government encouraged often inexperienced investors to buy, and China’s brokers Shanghai A-Sharesturned them into speculators by persuading them to leverage up.  China’s financial regulators were slow to react; a bubble formed and has now burst. 

The Chinese investment manager quoted above is probably right in wanting to buy.  Nevertheless, he may have to persuade his unit holders to stay long, and / or attract a sufficient number of new investors, to ensure that he cam implement his preferred strategy.   

(See also Thursday’s lead comment.)