(Bloomberg) -- A technology-focused China equity fund outperforming 98% of peers this year advises caution over the frenzy in artificial intelligence themes, saying it might be the biggest underpriced risk in the market.

“There are huge fundamental risks, especially in terms of public safety, in AI at this current stage,” said Yun Bingwang, an investment officer at Qingdao Luxiu Investment Management Co. in an interview last week. “These uncertainties mean that we cannot make investment decisions.” 

Yun’s Luxiu Lvjing Fund has returned 76% this year, according to fund tracker Shenzhen PaiPaiWang Investment & Management Co., trouncing the benchmark CSI 300 Index by 88 percentage points. That puts the fund, which primarily invests in global tech companies, in the top 2% among 10,308 peer private-fund products.

The fund owes its outperformance to bets on online retailer PDD Holdings Inc., best known for hit shopping app Temu and domestic bargains trailblazer Pinduoduo, amid the stock’s slump earlier this year. The stock has gained 139% from a low in May, compared with Alibaba Group’s 8% slump over the period in the U.S. The market misjudged Chinese consumers’ shift back into premium products after the end of Covid controls, said Yun. Dip buying in Apple Inc. shares in late 2022 also contributed to returns.

Top-Performing China Fund With 57% Gain Won Big With Bet on PDD

While Yun is keeping tabs on how AI is disrupting tech giants, he said there’s no rush to buy. He compares missing out on AI this year to side stepping the euphoria in Chinese private tutoring names in early 2021, with some firms losing almost all of their value later that year after a shock overhaul over the sector.

In China, six out the top ten performers on the benchmark gauge this year were lifted on AI wagers, with Dawning Information Industry Co.’s 73% advance helming the charge. The leading stock-focused mutual funds this year also count software, media and chip shares that benefited from the trade as their biggest holdings, according to data from financial website East Money Information Co. 

Still, there’s yet to be any AI company that ticks all the boxes for Yun, a former Didi Global Inc. director. He’s also worked for Tencent Holdings Ltd. and has more than two decades of experience in China’s tech and internet industries. Yun manages around 1 billion yuan ($140 million) in assets through the Luxiu Lvjing Fund and Lvjing Evergreen SPC, a dollar-denominated fund that’s returned 20% since its August inception.

“The early movers are not necessarily the final winners in the tech space,” he said, drawing on the example of how Tencent and Meitu Inc. first released short video platforms, which were followed much later by ByteDance Ltd.’s popular Douyin and TikTok apps.

While the fund may have missed out on the year’s AI gains, it has compensated for it with PDD, which recently overtook Alibaba Group Holding Ltd. in market value after shares surged on an earnings beat. Morgan Stanley also named the company its top pick in the China e-commerce sector last week, saying it’s best placed to benefit from price-sensitive consumers.  

“PDD and ByteDance have funneled off much of the market share and screen time from other Chinese tech firms,” Yun said. If ByteDance was listed, “the combined market cap increase of the two would make up for much of the shrinking value of the other tech giants like Alibaba and Meituan.”

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