General Open-End Funds Will Also Be Put On The "Magic Spell" To Invest In Fixed Assets.

In 2015, public funds focused on investing in small and medium-sized stocks, and the liquidity in the stock market crash almost dried up, almost causing the tragedy of the industry.

The stock market disaster is far away, but in order to prevent similar risks from happening again, regulators finally launched.

Last Friday, March 31st, at a weekly press conference, the SFC issued a formal public consultation on the regulations governing the liquidity risk management of public offering open-ended securities investment funds (hereinafter referred to as the "Regulations").

In the draft of the new regulation, in order to prevent liquidity risk caused by too much investment in some stocks, the SFC first restricted the proportion of the shares of the listed company's shares of the fund company for the first time.

According to the insiders, when the stock market crash took place nearly two years ago, the regulators intended to strictly limit the proportion of listed companies' circulation shares against the fund's products, so as to prevent potential liquidity risks caused by concentrated holdings.

To a certain extent, it limits the investment behaviors that rely on concentrated holdings to gain excess returns, and is more conducive to the smooth operation of public funds.

The fund's 2016 annual report released last week showed that as of the end of last year, some of the fund's open-end funds had a share of some stocks in circulation of more than 15%. Once the new rules are implemented, no matter how good a fund company is, these stocks must be reduced to meet the new regulation requirements.

To a certain extent, it announces the end of the mode of concentrating investment on the cold and small cap stocks to gain excess returns.

Before the publication of this draft, the public fund has always had the famous "double ten restriction" in investment operation. The thirty-second provision of the current "public offering of securities investment fund operation management measures" stipulates: "the fund manager uses the fund property to carry on the securities investment, must not have the following situations: (1) a fund holds a company's issued securities, its market value surpasses ten percent of the fund assets net value; (two) all funds managed by the same fund manager hold a company's issued securities, which exceeds the ten percent of the securities".

The "10% of securities" is the concept of total capital stock.

The relevant laws and regulations do not specify the level of circulating capital stock of listed companies.

However, in the fourth chapter of the "management regulations" draft, the fifteenth chapter "investment and paction restrictions" Fifteenth regulatory levels draw out the investment proportion restriction of the tradable shares, that is, all open-ended funds managed by the same fund manager holding shares of a listed company shall not exceed 15% of the listed company's tradable shares; all the portfolios managed by the same fund manager shall hold shares issued by a listed company, and shall not exceed 30% of the listed company's tradable shares.

Special investment portfolios that are fully determined according to the proportion of the index and the CSRC can not be restricted by the foregoing ratio.

This is the first time regulators have held publicly traded funds.

The ratio restrictive provisions.

In this regard, the SFC explained in the drafting instructions that this is mainly for the public fund to "adhere to the principle of portfolio investment and improve the ratio of concentration ratio of public offering fund".

On the one hand, on the basis of the original investment fund's "double 10 ratio" investment restriction, we should further impose a 15% upper limit on the proportion of all public funds managed by the same manager holding the shares of a single listed company.

The existing "double 10 ratio" stipulates that we should learn from the mature market practice and take the total capital stock of listed companies as the control benchmark. However, under the current China's distribution system, the total capital stock and the circulating capital stock of a large number of listed companies are quite different due to the restrictions on the sale of major shareholders. From the perspective of avoiding the liquidity risk caused by the circulation of stocks in the over set of funds, it is necessary to supplement corresponding investment restrictions in light of China's national conditions.

On the other hand, the total investment portfolio of the same manager (including the combination of public funds and special accounts) holds a 30% upper limit on the circulating shares of a listed company.

We must control the liquidity risk of fund managers and prevent the managers from taking advantage of shareholding advantages to implement market manipulation and other illegal activities.

In addition to managing the public fund, the fund company also manages the non-public offering combination of special account combination, social security fund portfolio and enterprise annuity combination. Once all these portfolios hold the circulation shares of a single listed company no more than 30%, how to balance the proportion among the various combinations will be a new problem facing the fund companies.

Especially for small stocks whose market capitalization is small, they are likely to exceed the standard.

The fifteenth rule of this regulation is summed up as the concentration of the new deal, and the direct principle of the new deal is the stock market crash that broke out in 2015.

Time goes back to the crazy and unbearable summer in 2015.

At that time, the small and medium sized market investment became popular, and the public funds were also in the rush. Many companies concentrated investment in small and medium sized businesses, which led to the fact that many stocks, especially small and medium-sized stocks, were highly controlled by some fund companies. This centralized shareholding mode encountered a severe crisis after the stock market crash. Due to the extreme panic in the stock market, small and medium-sized stocks were sold out madly, and liquidity was almost exhausted. Centralized holding small and medium sized public funds faced the pressure of redemption and could not sell their stocks in real time to deal with the redemption. If it were not for the strong rescue of the market, the public funds would almost lead to industrial risks.

At the national securities and futures regulatory conference held in January 2016, Xiao Gang, then chairman of the securities and Futures Commission, said in his speech several times that the collective investment fund exposes a concentrated investment risk. Xiao Gang said in his speech that during the period of the stock market crash, the public funds suffered huge redemptions. "Some public funds have not been assessed prudently, and a high proportion of them have concentrated on GEM stocks. Meanwhile, their own risk accumulation has also caused great risks to the market, especially during the abnormal fluctuations of the stock market, which once occurred liquidity problems and almost led to the industry crisis".

"To recend the pain," to strengthen the liquidity supervision of public offering funds, and further improve it.

We should establish a comprehensive prevention and control mechanism for liquidity risk of public offering funds. "

It has become an important task for regulators to prevent market risks since last year. The request for investment restrictions on public offering fund circulation stocks issued last Friday is precisely the lessons learned by regulators to sum up industrial risk events and targeted measures to prevent leakage.

Once the new rules of concentration are implemented, it will have a great impact on the operation mode of public fund investment.

In the past, some public offering funds were often heavily engaged in the core pool stocks that they thought were very well studied. When these stocks were smaller, they tended to reach a high degree of control, thereby affecting the performance of individual stocks.

Therefore, in the view of some fund managers, this has a certain impact on small and medium-sized enterprises whose market capitalization is relatively small. Although the public funds have largely reduced the number of small and medium-sized stocks since 2016, many companies still insist on concentrating on such stocks, and many of their funds hold the same stock and exceed the new rule red line of 15% of tradable shares.

Let's take a look at the latest annual report of the fund to see that the public fund generally exceeds the proposed new red line.

According to statistics on the shareholding detailed data of the public offering fund released in 2016 last week, a total of 70 shares of a single fund company owned a single stock exceeding 10% of the circulation market, while more than 15% of the total number of new regulation red lines was 9, compared with the number of over 10% of the public funds raised in the middle of 2015 and 33 of the super circulation market 15%.

In the middle of 2015, some fund companies' funds held a single stock market, reaching a maximum of 40%, reaching a high degree of control.

In the 2016 annual report, the Oriental fashion circulation market held the highest proportion of the single fund companies, reaching 26.6%, while the nevus technology exchange board was held by 23.63% of the funds of another fund company.

Jiuzhou pharmaceutical, Dongfang net power, Taiwan nuclear power, Kang Hong pharmaceuticals, Heng Hua technology, Ding long shares, and crystal technology and other stock market of the single sheet fund company's fund held a proportion of more than 15%.

Most of these stocks are small and medium sized boards and gem, and some large scale fund companies can easily buy a higher proportion of the circulation market.

Another rabbit baby, Guang Bo shares, Tanaka precision machine, Zhi Yun shares and many other stocks were sold by a single fund company more than 14%.

Although the overall investment of public offering funds is not serious at present, once the growth stocks are rising in the future, the investment demand of various investment portfolios of the fund company will increase to small and medium sized investments. The investment in single stocks is bound to be in conflict. More funds will squeeze the space for other funds to buy, and the purchase of non public funds will also squeeze public funds to buy space.

Fund companies will face new problems of how to balance investment limits and prevent conflicts of interest.

Of course, this occurs mainly in the smaller market capitalization stocks, and the stock market with larger market capitalization generally does not exist.

In fact, in addition to limiting the proportion of investment in tradable shares, the draft regulation provides a clear upper limit for open-end fund investment and circulation assets.

The sixteenth requirement of regulation is: "the total market capitalization of a single open-end fund investing in a liquid Limited asset shall not exceed 15% of the net asset value of the fund.

As a result of factors such as fluctuations in the stock market, stock suspension of listed companies, fund managers and other fund managers beyond the proportion of factors that do not meet the above limit of proportion, fund managers shall not take the initiative to increase investment in liquid restricted assets, and shall adjust them within 10 trading days of sale, pfer or resumption of pactions with limited liquidity.

The SFC believes that the move is aimed at enhancing the liquidity of the portfolio so as to clarify the upper limit of the liquidity restricted assets held by the open-end fund.

Because the traditional open-ended funds mainly invest in assets such as stocks and bonds that are traded on the stock market, the regulation does not limit the liquidity restricted assets held by open-end funds.

With the development of the market, the scope of investment in public funds has been slightly expanded, and some restricted assets are included in the investment scope.

2015 part of the open stock market during the stock market movement.

Due to a certain proportion of investment in listed companies such as fixed stock increase, such as restricted stock, leading to greater liquidity pressure.

In this regard, drawing on overseas regulatory rules, the "regulation" proposes to limit the proportion of liquidity restricted assets held by open-end funds in the 15% initiative.

In addition, the open-ended fund which currently requires regulation holds at least 5% indicators of cash assets ratio, and further strictly establishes the calculation standard.

Non public offering investment with a fixed lock period (usually one year or three years) is a restricted asset that public investment funds often invest in. In recent years, the non-public offering market has seen explosive growth. The private placement of ordinary open ended funds has become the norm, but the relevant laws and regulations have not been restricted. However, the net value of large redemptions has been shrunk after the increase of single fund investment. The situation of the passive increase of the market value of the fixed stock market in the net value has increased by more than 50%.

The SFC strictly restricts the investment and circulation of ordinary open end funds to some extent, which can reduce the occurrence of such situations to a certain extent.

With the restriction of the investment restriction, the public funds will have a greater impact on the fixed investment, especially those who are interested in increasing investment.

In addition, the increase in fund investment with more shares in suspension will also be limited.

From the 2016 annual report of the fund, it seems that there are still a lot of public funds that have higher proportion of restricted assets such as fixed and suspended shares.

It can be said that no matter whether the investment proportion of negotiable stocks is restricted or the proportion of restricted assets in circulation is restricted, once the relevant regulations are put into effect, it will inevitably cause a lot of influence and adjustment to the existing investment operation mode of public funds, but this will help to reduce the occurrence of liquidity risk and contribute to the steady and healthy development of public funds.

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