單押阿里巴巴的教訓

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https://seekingalpha.com/article ... tions-low-cost-etfs


Introduction
If one glances over the articles covering Alibaba Group Holding (BABA) over the past year, then it's almost exclusively touted as a strong buy with the arguments for an investment growing as the stock price receded during 2021. I've belonged to that flock posting my stand back when Alibaba traded 45% higher. Looking at Alibaba today objectively, I maintain the position, that it appears cheap from a valuation perspective. However, Alibaba turned out to be my worst investment by far in 2021 to the point, that I had to review how I got it wrong which led to acknowledging the political aspect more so than normally. As a long-term investor I don't pay much attention to politics as GDP and economic wealth historically has grown through numerous political headaches, recessions, war's both cold and warm, health- and environmental crisis and so forth. As such, excellent companies will continue to do well despite short-term volatility. Having said that, I've learned that maybe that approach doesn't work always, and maybe governments can exert pressure to the point, where some companies become almost hopeless seen from an investment perspective.

The saying goes," Don't fight the FED", maybe it should include "Don't fight the Chinese Communist Party".

I exited my position for tax harvesting purposes, but there are strong arguments to maintain exposure to the economies and countries of Asia and even Alibaba. I've pondered about this question for most of 2021 trying to understand my mistake and learn from it. There is no guarantee that my new approach will be better than having stuck with Alibaba as a direct investment, but I believe it represents a better risk-reward trade-off, at least according to my own risk profile.

We all work hard for our savings, and those savings can only be allocated once, so an investment decision doesn't come by lightly for my own regard. Therefore, I also see a need to learn from the mistake related to my perception of how the Alibaba situation would unfold.

If one has invested long enough, you will eventually come across a case where the numbers indicate that a given company or sector should be a strong buy, but where the market disagrees and continuously pushes the stock or sector further down. Remember, even if a stock falls 50%, it can just as easily drop another 50% perpetually. With Wall Street slapping a 'strong buy' on Alibaba, it's easy to agree and ask what is going on, as I'm sure many analysts do considering the consensus price target standing at above $190 per share, suggesting immense returns.

Looking at Alibaba today, 63% off its most recent high it's tempting to look at the financials and come to the same conclusions as when the stock traded at $220 per share, or $180 per share or $120 per share - that this company has no further to fall. In a world where its peers hold markets caps in excess of $1 trillion, a company like Alibaba with a mere market cap of $310 billion supposedly has to be a real treat given its market position and outlook, perhaps, and maybe I sold close to the bottom when I exited back in Q4, but I just couldn't justify the risk and the fact that this company is more about the government pulling the strings than its fundamentals, at least for now.

Having said all that, the region still offers a blooming economic outlook that is worth being exposed to, and there are other routes than a direct allocation to Alibaba. Sitting more than 4000 miles away from Beijing I've come to the respect the differences more than previously.

What Alibaba Represents
Truth be told, if you had but a minute to mention all the Chinese or East-Asian companies you could, would you manage more than a handful or two? That "fact" is interesting as it increases the likelihood that the average retail investor follows the herd into the same few stocks covering an immensely complex and growing part of the global economy, which is so much more than a few companies. I believe in diversification but if knowledge concerning a geographical region is lacking, it decreases the quality of said possibility to ensure proper diversification.

An investment in Alibaba represents one of the hottest topics these years, the growing E-commerce exposure as well as access to some of the most significant middle classes of the future. In the times of COVID-19, the Asian economies has shown resilience and still posted growth, more so, than many other countries and regions of the world.

McKinsey proclaimed, that we are living in the Asian century with five post-pandemic opportunities solidifying that position. The five opportunities are:

Strengthening Asian networks of trade and flows
Boosting growth through innovation
Drawing a new consumer map
Leading the climate transition
Enhancing corporate profits by unlocking productivity
Seen from a distance, Alibaba tap into most of these headlines and as an economic titan within E-commerce, it's a company that is hard to bypass when considering those who may benefit from future trade, digitalization and innovation, on the contrary, it may lead it.

"Asian consumers are expected to account for half of global consumption growth in the next decade, equivalent to a $10 trillion opportunity. However, Asia's consumer landscape is changing and diversifying as the result of demographic and technological shifts.

First, as incomes rise across Asia, more consumers will reach the highest tiers of the income pyramid. By 2030, recent MGI research found that 70 percent of Asia's combined population may be part of the consuming class, defined as spending more than $11 a day in 2011 PPP terms. As recently as 2000, only 15 percent were in this category-a huge upward shift in purchasing power."

Source

At the centre of E-commerce with a TTM revenue of $126 billion, EBITDA of $24 billion and R&D budget of $8.6 billion I don't see a reason why Alibaba shouldn't carve itself a big slice of the pie in terms of the improving economics in terms of its near geographical outlook. The world bank has highlighted some of the challenges facing the Chinese economy, with some of them only coming to the surface as COVID-19 has unfolded including slowing growth and harsh shutdowns related to outbreaks including the need to deleverage the corporate landscape and strike the right balance in terms of transitioning to a modern economy, which the world bank labels high-quality growth. However, even as the Chinese economy matures or slows down, there is plenty of neighboring countries about to flourish for the coming decades such as Indonesia, Vietnam & India.

Looking towards Alibaba's most recent investor day, which took place barely a month ago, they also underline some of these exact thoughts arguing their strong market position within the domestic market while also emphasizing its low market penetration outside of China. With innovation being one of the pillars that will help the company grow even further.

Alibaba Global Footprint
Alibaba Global Footprint (Alibaba Investor Day 2021, p. 16.)

Alibaba Domestic Consumer Footprint
Alibaba Domestic Consumer Footprint (Alibaba Investor Day 2021, p. 5.)

As Alibaba is still expanding its total addressable market, it carries significant advantage to already be top of mind with an existing and loyal cohort. We often speak of content and eyeball hours, something that Alibaba should be able to address more and more as time passes. Unsurprisingly, management also coins the core strategy as depending on user growth, share of wallet expansion and value creation. Seen from a distance, Alibaba has a plethora of avenues to pursue its growth both domestic and abroad.

Alibaba Share Of Wallet Expansion
Alibaba Share Of Wallet Expansion ( Alibaba Investor Day 2021, p. 9.)

As such, for investors, Alibaba can easily come off as a compelling investment as it taps into so many themes and avenues they are set to grow, which can ensure this already vast company keeps on growing. These were some of the observations that made Alibaba so compelling to me and that still make the company compelling.

All that aside, the market cap has been ever down trending however seeming to regain ground around its current level despite the strong market wide sell-off recently.

As it's not Alibaba's lack of capability to ensure it executes that is the problem. Neither that it can't grow any further. Instead, it comes back to the changing degree of political involvement and interference.

The Political Aspect To Alibaba
There is no debating Alibaba these days without mentioning the Chinese Communist Party. The core of the matter is, that no single individual can predict how the situation unfolds with certainty, but that if we look back, the negative headlines surrounding Alibaba has been significant.

Antitrust investigation & related fine
Potential corruption scandal surrounding Ant Group
National regulatory crackdown concerning internet and gaming usage
The potential NYSE delisting
Those were just the ones I could remember, I'm sure there have been other headaches during the past year.

I personally don't have the imagination to conjure up what else Beijing could decide to impose on Alibaba at this point and I personally believe the negative headlines must be about to come to a halt, however, going back a year I didn't have the imagination either to foresee how the situation would unfold as I back then also expected it to be a temporary situation. Point being, all of this adds uncertainty to Alibaba and its shareholder base that exerts itself in the form of a drastically reduced market cap no matter how the financials might have looked.

I could write a lengthy essay under this headline, trying to predict or negate that it can become worse, but what if it all of sudden becomes better, will the investment community then have regained trust in the blink of an eye? I don't know, and no one knows so such a row of lengthy arguments serves little purpose.

Personally, I perceive this as a changed landscape, that investors from here on out have to take into consideration that the CCP can change direction at the snap of their fingers pointing to the greater good for the Chinese society and its long-term development plan for the country and region. Fair enough, but then I'm not bold enough to suffer the concentration risk.

Companies rely on being able to conduct business in stable environment, which also includes the regulatory and political aspect, and neither of those can be considered stable at this point in time, at least not from my perspective.

Alternatives Do Exist
I stand fast on the argument that a portfolio deserves some exposure to emerging markets. However, sitting several thousand miles away from China I've come to the realization that concentration risk might best be avoided or limited. First, diversification is one thing, thus ensuring that even though a 50% drawback in Alibaba was unpleasant, it's in no way significant for a portfolio in the larger perspective. However, concentration risk is still a matter in the discussion surrounding Alibaba. I'm sure Asian based investors can name in hundreds of local companies, but the average European or American investor will not have that ability, so is it really worth the risk trying to beat the market or is it better to spread the concentration and accept a return on par with the market. I believe the second approach is better no matter how tempting Alibaba can come off as it now trades around $120 per share or $190 as was the case only half a year ago, which has turned into a negative 40% return despite the vast majority of analysts being bullish the company.

A low-cost ETF offers an avenue to ensure exposure but at a lower company specific concentration, while still maintaining exposure to a company like Alibaba.

Let's have a quick look at some of the options.

KraneShares CSI China Internet ETF
KraneShares (KWEB) has a bit more than 50 holdings with the top ten making up 57% as of 31st of December 2021. Assets under management is a bit below $6 billion with an expense ratio of 0.7%.

Alibaba is naturally a significant holding for KWEB, as it currently makes up 6.5% equivalent to the third largest holding and depending on time horizon, it has delivered more or less the same return as Alibaba.

As the name gives away, this is an ETF focused on Chinese companies therefore also giving exposure to the strong growth that persists within the Chinese economy, at least on the mid-term. The Chinese economy did grow 8.1% during 2021.

iShares MSCI China ETF
The iShares China ETF (MCHI) comes off as similar to KWEB as it also holds roughly $5.5 billion under management with an expense ratio of 0.57%. However, it is much more diversified with more than 600 holdings though the top ten still makes up 40%. Here, Alibaba is the second largest holding at 9%, but comparing the these first two ETFs along with Alibaba, it becomes evident, that MCHI is less volatile due to its reduced concentration meaning it returns less both positive and negative as it's less concentrated around its major holdings.

As such, the effect of having a single holding that appreciates in four-digits and draws the entire ETF along with is, is diminished compared to a more concentrated holding like KWEB. Similarly, it isn't impacted to the same extent in the opposite direction.

Alibaba and KWEB ETF and MCHI ETF return
Data by YCharts
iShares Asia 50 ETF
The iShares Asia 50 ETF (AIA) goes beyond Chinese companies and therefore offers more geographical diversification while still being fairly concentrated at just above 60 holdings with the top ten weighing above 60%, which is a high concentration for the top ten in general when considering ETFs. Above $2 billion in AUM and an expense ratio of 0.5%

It could be argued that the concentration is made up for, by the fact that it covers several economies and therefore reduces some of the domestic risk associated with its top holdings.

iShares MSCI All Country Asia Ex-Japan Index ETF
This iShares All Country Asia (AAXJ) has over 1000 holdings, above $4 billion in AUM and an expense ratio of 0.69%. Its top ten holdings make up 28.6% with Alibaba as the fourth largest at 3.3%. This is maybe taking diversification to the extreme, but it does come in at the second place behind AIA when observing its performance on a five-year time horizon. Similarly, if we contract the horizon to three years or expand it to ten years, it still comes in second behind AIA.

As evident, if Alibaba and the Chinese companies in general hadn't experienced its massive pullback, there is a good likelihood that the tables would have been turned and that the purely Chinese ETFs would have outperformed AIA and AAXJ respectively.

Alibaba vs low-cost ETFs return
Data by YCharts
Naturally, any of these ETFs come with exposure to Alibaba, and rightfully so as it will remain centre stage as both the Chinese and its neighbouring economies grow stronger and continue to elevate more of its citizens into the growing global middle class who desire the daily luxuries of those already belonging to that middle class, something that Alibaba can provide and also turn a profit on. Similarly, as digitalization expands globally, Alibaba will be there to profit from it. As such, it's only positive that Alibaba remains a core holding within all of these ETFs, but by going with a low-cost ETF, the concentration risk and exposure to what individual governments may consider sensible, is reduced.

As I'm based in Europe, these ETFs come with a taxation consequence that isn't optimal for myself, and I've therefore opted for a similar low-cost product extended by a local financial institution, and I'll follow this path going forward as there is an unknown factor to conducting the due diligence when the political and cultural gap is so wide. This approach still allows exposure to Alibaba, but reduces the company specific risk.


Conclusion
Alibaba is already a titan on its own with an interesting outlook due to its firm grasp on its existing market and competitive arena's. It's difficult to argue against the possibilities surrounding this company from a financial standpoint. However, companies and their investors do rely on a stable foundation in terms of regulatory and legislative conditions. Much has changed with the Chinese Communist Party interfering and changing those conditions within the last twelve months to the point, where I personally believe that it's difficult to gauge when investors can say that trust has been restored in terms of no further impact reaching Alibaba and its peers. As such, a company specific investment in for instance Alibaba carries an additional risk that can't be ignored. A risk I'd personally like to try and mitigate while maintaining exposure to one of the strongest growing regions in the world in terms of growing economical wealth amongst its citizens. As such, I believe a sufficiently diversified and low-cost ETF offers that avenue.