Recent market volatility has triggered a noticeable correction in the micro-cap stock sector. Many investors focused on this segment are now questioning whether to cut losses and exit or view the decline as a buying opportunity.

Honestly, watching the micro-cap index retreat from its highs evokes both anxiety and temptation—given its strong long-term performance, the current pullback raises the question: is this a risk release or a strategic entry point?

We directly invited CITIC Prudential Fund Manager Wang Ying to share her plain-spoken views on the current market and micro-cap stocks.

**Contrarian Investing and Early Positioning** What are micro-cap stocks? They are smaller companies in the A-share market, typically with market capitalizations ranging from one to two billion yuan.

Why focus on them? Wang Ying offers an interesting explanation: these stocks inherently possess what she terms a "three lows, one high" advantage—low institutional ownership, low selling willingness among major shareholders, low turnover rates, and high volatility elasticity.

In other words, these stocks have a downside cushion and upside potential.

Wang Ying believes that for stocks with these characteristics, investors can adopt a contrarian approach during fluctuations, positioning and buying during the left side of price volatility.

For example, buying when market attention toward a listed company is low, then capturing gains when both volatility and attention increase.

**Why Not Simply Replicate the Micro-Cap Index?** Some may ask: since the Wind Micro-Cap Index has performed so well, why not just replicate it?

Wang Ying's answer: theoretically possible, but practically too costly.

"That index rebalances daily. Fully replicating it would mean transaction fees eating significantly into returns."

She suggests an alternative: using quantitative models to refine the strategy.

By maintaining highly dispersed holdings and making minor adjustments based on model signals, investors can average out repositioning pressures. This approach follows the index's logic while reducing costs.

"Individual stock contributions may be unstable, but accumulated across a basket of stocks, returns can become more consistent."

**Risk Management: Three Key Actions** Micro-cap stocks are highly elastic and can fall sharply, as seen in early 2024 when the sector dropped over 40%.

Wang Ying's risk control logic operates on three levels: - Stock level: Exclude companies with delisting risks or negative publicity. - Sector level: Monitor "crowding"—such as the proportion of micro-cap trading volume in the overall market. - Portfolio level: Expand fund capacity by holding numerous diversified stocks, limiting individual positions to reduce impact on overall returns and enhance resilience to liquidity shocks.

However, she emphasizes avoiding frequent, large-scale position adjustments. "The risk of missing out is also significant. The long-term trend of the micro-cap index is upward with fluctuations; reducing positions too early may mean missing rebounds."

**Current Market Outlook: Liquidity Remains Key** Discussing recent market conditions, Wang Ying shared her observations.

"Many worry about liquidity tightening this year, but for micro-cap strategies, as long as there isn’t rapid systemic capital outflow, she believes the impact is manageable." She notes that this strategy essentially acts as a "liquidity amplifier"—rising sharply when capital flows in and falling steeply when it exits.

However, the current situation differs from the past.

"Since the September 24, 2024 market event, it’s clear that market liquidity is being managed." Wang Ying states that stabilization funds are already in effect, reducing the probability of sharp, systemic crashes.

Under what conditions might micro-caps face pressure? She highlights two scenarios: first, the emergence of an exceptionally strong sector attracting all market capital; second, a sudden global risk aversion triggering widespread sell-offs.

"But for now, neither scenario appears likely," she says.

Additionally, current indicators—whether crowding or liquidity—show no strong warning signals.

**Personal View: Avoid Chasing Highs, Wait for Pullbacks** Toward the end, we asked the practical question: when might be a good time to enter?

Wang Ying’s advice is straightforward: avoid chasing highs and wait for corrections.

"Buying at lower levels improves mindset. You’ll dare to add positions during dips and hold during rises."

She specifically cautions against being intimidated by the micro-cap index’s multi-year gains. "The index’s net value reflects past realized returns, not current valuations. It rebalances daily, still targeting cheaper small-cap stocks."

**Final Thoughts** A key takeaway from the interview is Wang Ying’s clarity of thought—she avoids trend-chasing and stays focused on精细化 operations within her niche.

This methodology can be summarized as "making volatility a friend"—seeking opportunities where others overlook and extracting returns from fluctuations.

For those interested in micro-cap strategies, consider starting with dollar-cost averaging or entering during corrections. Holding steadfast is key to realizing gains.

Note: The above content is intended to showcase the fund manager’s investment perspective and current market analysis, not as an investment commitment. Investment strategies, sector allocations, and specific holdings may adjust within fund contract parameters based on market conditions.

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