The tech rally reached its peak in the second quarter, prompting many funds to chase high valuations in growth sectors. However, the cost of entering at elevated prices was realized in July, as funds heavily allocated to technology experienced severe drawdowns.
Smaller funds like Zhaoshang Core Equipment and Hengyue Jiangxin Youxuan One-Year Holding saw their net asset values (NAV) plummet by up to 50% in a single month after extreme portfolio shifts missed the market peak. Even some star-managed products that transitioned to a co-management model and bought in during the second quarter could not avoid the sector's downturn. This scenario highlights the risks of blindly chasing a single, high-valuation sector near the end of a market cycle, where a style shift can lead to substantial losses.
Where the Trouble Began
During the second quarter of 2026, the rally in A-share tech stocks intensified, with sectors like AI computing power, optical modules, memory chips, and semiconductors soaring. This attracted many funds to increase their positions. However, these funds generally failed to match the market's average returns in the second quarter and were hit hard by the July correction.
Zhaoshang Core Equipment was one of the hardest-hit funds in July. After its portfolio reshuffle in the second quarter, the fund saw a NAV growth of 45.47%, but this performance was not exceptional. Hundreds of actively managed equity funds had already achieved returns exceeding 50% in the second quarter. Yet, with the July sell-off, the fund's net value was halved, experiencing a maximum drawdown of 51.54% in a single month, ranking first in drawdowns for that period. Its year-to-date return quickly turned negative. This reversal stemmed from late-cycle buying. The fund's report shows that at the end of the first quarter, it held stocks in defense, machinery, automobiles, power equipment, and TMT. By the second quarter, it had swiftly pivoted to the AI sector, with nine new stocks entering its top ten holdings. This late shift resulted in modest gains for the entire second quarter but the industry's worst drawdown in July. Zhaoshang High-End Equipment, managed by the same team, followed a similar pattern.
The chase by Hengyue Jiangxin Youxuan One-Year Holding was also telling. Initially a consumer-focused fund with holdings in food, beverage, and tourism at the end of the first quarter, it underwent a complete portfolio change after a change in fund manager in June. Its second-quarter report showed a full pivot to tech sectors like AI computing power and semiconductors. Due to the late timing, its NAV increased by only 3.55% in the second quarter, well below the market average. The fund then suffered a 46% decline in July.
The Changsheng Transformation and Upgrading Theme Fund also heavily increased its tech stock holdings in the second quarter. The fund added positions in the AI computing power sector, focusing on optical chips, semiconductors, and PCB materials. Its NAV grew by 43.1% in the second quarter but fell by 43.8% in July, significantly reducing its year-to-date returns. Other funds, including Zhongyou Core Growth, Zhongyou Core Theme, GF Qianyuan Value Growth, and Qianhai Open Source Ganggang Shenxin Hardware, also experienced heavy losses in July after making similar large-scale tech bets in the second quarter. Additionally, some newly established funds, like Guotai Haitong New Energy Ruixuan, built their initial portfolios around tech stocks, suffering the same fate.
Even Top Fund Managers Got Caught Up
Notably, funds managed by top-tier investors Liu Yanchun and Zhang Kun also bought into tech stocks in the second quarter after adding co-managers, exposing them to the July correction.
After shifting to a co-management model, several products managed by Liu Yanchun moved away from their traditional consumer blue-chip focus. The most prominent example is Invesco Great Wall Dingyi, which added Ke Haidong as a co-manager in May. Its second-quarter report showed a complete overhaul of its top ten holdings, swapping from consumer and healthcare stocks like Kweichow Moutai, Haid Group, and WuXi AppTec to AI computing power and semiconductor names. The fund's NAV dropped by 27.65% in July. Another Liu Yanchun fund, Invesco Great Wall Jiying Growth Two-Year Fixed-Open, added Meng Qi as a co-manager in June and made significant purchases of tech stocks like GigaDevice and Zhongji Innolight in the second quarter. This fund saw its NAV decline by 17.61% in July.
Zhang Kun's E Fund Blue Chip Select significantly reduced its holdings of traditional baijiu heavyweights like Kweichow Moutai, Luzhou Laojiao, and Wuliangye in the second quarter. For the first time, it added two AI computing power stocks, SMIC and Dongshan Precision, to its portfolio. However, as these positions were not a large part of the fund's holdings, it managed to avoid a sharp NAV decline in July.