Group Market Induces Extreme Market, Long-Term Avoidance Of Public Fund Stampede

Liu Feng, chief economist of galaxy securities, man Le, researcher of 21st Century Capital Research Institute

In 2020, with the Shanghai Composite Index leaping by a thousand points, public funds will usher in a significant historical opportunity for development in 2020, with a new scale of nearly 4 trillion yuan in the whole year, which has reached a record high, accounting for more than 25% of the total stock.

From the point of view of history, history is always astonishingly similar, and there are new phenomena.

Among the newly increased scale of public funds in 2020, the largest single month investment data occurred in July when the market rose sharply; from the statistical dimension, about 2 trillion yuan increased during the fourth quarter, and the proportion of incremental scale equity was relatively high. This means that the overall investment enthusiasm of the people is later than the start of the stock market. Different from the previous unilateral market, investors "speculation first" option, in 2020, the logic of "buying stocks is better than buying funds" has become the mainstream in the investment and financing market.

This has also become the main reason for "the fund makes money, the foundation people don't make money".

This change also produced a new chain reaction

First, after the Spring Festival in 2021, with the overall operation of the market reversed, fund companies encountered varying degrees of "redemption pressure", leading to the market capital tension.

Second, in 2020, the white horse blue chip with Guizhou Maotai as the "totem" embraced by public funds, that is, the so-called core assets suffered a sharp decline, which led to an increase in market pessimism.

Third, the issuance of new funds has entered the freezing point cycle. While dealing with the redemption, public funds can not attract incremental funds into the market, and can not capture the bottom copy opportunities brought by excessive market correction. Therefore, it is unable to suppress the extreme changes in the market.

How to avoid the occurrence of extreme market, guide the long-term development of public funds and the long-term and stable operation of A-share market from the mechanism has become a subject of historical significance.

At present, the domestic public fund industry is still in the initial stage of vigorous development. With the wealth of Chinese residents gradually equal to that of mature Western markets such as the United States, by the end of 2020, the total scale of public offering and private placement institutions in China's asset management industry will be 58.99 trillion, which is only equivalent to BlackRock, the world's largest asset management company.

Historical inevitability of multiple factors contributing to group market

If we extrapolate from the results, we can clearly see that when the public funds repay the inflow of funds in 2020, "group" has become one of the few options.

For example, in 2020, the white horse blue chip led by Guizhou Maotai was held by a large number of public fund products, and the stock prices of individual stocks continued to rise. The stock price of Guizhou Maotai once exceeded 2600 yuan, setting a record high.

The birth of the group market, created a high yield.

According to the data released by Galaxy Securities Fund Research Center, as of December 31, 2020, according to the three-level classification standard of China Galaxy Securities public offering fund classification system (2020 Edition), the average performance of main fund types in 2020 were: standard stock fund yield 54.99%, mixed partial stock fund yield 59.57%, long-term pure bond fund yield 2.69%, The yield of ordinary bond funds (convertible bonds) is 4.02%, and that of money market funds is 2.02%.

Among them, a total of 84 active partial equity funds yield more than 100%, and five passive index funds yield more than 100%, a new high since 2007.

This also directly results in the new fund driven, public fund managers are forced or take the initiative to put their chips into the market. The relevant fund managers are also aware of the risks, so they choose the "group" strategy, that is, public fund managers refer to each other's positions, and finally select relatively risk-free assets dominated by Guizhou Maotai for high proportion allocation. All fund managers who allocate group stocks are holding on, and the risk seems to be controlled to a certain extent.

It seems that the funds "hold" one or two stocks, but with the further deviation between the stock price and the value of individual stocks, even the best assets have their corresponding prices. After all, the stock prices ultimately reflect the actual profitability of listed companies. Under the influence of funds, the stock prices of some individual stocks overdraw their value.

As a result, under the background that public funds are constantly developing funds and unifying strategies, the prices of some high-quality assets will be blown up like "balloons". The bigger the "balloon", the higher the risk of its explosion, and the explosion is only in a moment, the speed of falling stocks will be faster than the speed of rising.

There is also a background that can not be ignored is that the risk events represented by "two health" frequently appear in A-share market. Especially in 2020, many large-scale private enterprises and even state-owned enterprises have debt repayment risk, which makes the A-share market risk consensus become sharp, and the capital end is pouring into individual industry sectors.

This trend has directly led to the phenomenon of funds withdrawing from some non hot spots.

But such a large-scale group action will be frustrated after the Spring Festival in 2021. At present, when the market analyzes the trigger reasons, on the one hand, there is a slowdown in incremental funds, even the impact of fund redemption; on the other hand, due to the impact of valuation, more and more fund managers believe that the "group" market itself can not be sustained and begin to turn to the cyclical plate.

Multiple factors caused a sharp reversal of the market.

For example, after the beginning of the year of the ox several trading days, A-share adjustment, a large number of fund group shares plummeted, market style change. From February 20 to 22 alone, there were as many as 1996 funds with a cumulative decline of more than 5%.

But on the whole, the sharp rise and fall of A-share market before and after the Spring Festival is closely related to the inherent problems in the current public offering fund industry. And this kind of market change, and further caused the subsequent market "trample", intensified the fluctuation of the capital market.

Under the general trend that institutional investors gradually occupy the main part of A-share investment, how to avoid the extreme market situation induced by institutional investors is put on the table again.

There are some problems in public funds, which aggravate the market changes

For public funds, they are more accustomed to "issuing new shares" when the market is good and individual stock prices are high, which is directly related to the operation mode of domestic public funds.

First, at present, fund management fees constitute the pillar income of domestic public funds. The incentive of public funds does not match the purpose of long-term and stable development of the capital market.

As a result, the income of fund companies is less related to product performance, but more relevant to the overall product management scale. Under the influence of the profit-making effect of the stock market, new funds issued when the market is hot can often obtain higher circulation.

On the contrary, when the market is poor, public funds will not make large-scale allocation or issue new products in the equity market in advance, but will invest 70% to 80% of the funds into the money market.

Second, ignoring the investment, education and service work of the new fund, resulting in the illusion of low price of the new fund, which leads to the irrational entry of funds into the market.

At present, affected by the sales behavior of channels and fund companies, investors are more keen to buy new funds and think it is "cheaper". But the price of the fund is changed according to the current value of the assets. The new fund has not yet established a position, so it can only use 1 yuan as the benchmark. The new fund issued in high position is the highest risk, while the old fund has relatively small risk due to the continuous construction of positions. After running in the management mode, investors can also refer to the performance benchmark.

This is closely related to "interest inertia" such as new fund subscription rate and channel follow-up Commission, but it also stems from the lack of education for investors, or even neglect.

In the early stage of the good market, mutual fund managers continue to issue new products to attract investors into the market, and the product scale is also growing in this process. As a result, when the recent extreme market broke out, fund companies have management fees as a stable source of income, while the fundamentalists need to pay for the new fund's big market. This is also the main reason for "the fund makes money, the foundation people don't make money".

Third, there is a big gap between the earnings expectation of "new funders" attracted by unilateral market and the earning ability of fund companies. In the process of market reversal, investors will be able to redeem in large scale.

Affected by the profit-making effect, the foundation people will have higher expectations for the return rate that they can obtain in view of the prediction of the trend of the big market, which will also force the managers of public funds to put their assets into the market at a high level and win higher returns.

Capital flow has a significant impact on the behavior of mutual fund managers. In order to protect their ranking, fund managers will change their investment style in the past to cater to the market. At present, domestic investors generally pursue short-term performance, and many people pay attention to the change of fund return rate every month, every week or even every day, which makes many asset managers "forced" to chase short-term ranking, ignore long-term stable return and ignore to mine effective information about assets.

This kind of market behavior further distorts the price of assets and causes the mismatch of fund capital resources, thus reducing the effectiveness of the capital market and ultimately damaging the interests of investors.

Fourth, the three-year performance incentives that many fund companies have tried are just "decorations", which have no effect on promoting fund managers to pay attention to long-term management performance.

Some head offices use the "three-year" performance as the year-end bonus evaluation standard, trying to reverse the excessive pursuit of short-term performance by fund managers. However, the three-year assessment is the benchmark of "assessment date", which is postponed for three years, and continues to be postponed according to this mode. Since the implementation of the incentive year, the performance of fund managers in the first two years has been "foregone", so there is a greater impulse to sprint short-term ranking.

Some fund companies implement incentive methods, which are excessively linked with the management scale of fund managers and over incentive for short-term performance, all of which aggravate the short-term investment behavior of fund managers, resulting in the accumulation of market risk.

The great development of public funds in 2020, on the one hand, means that institutional funds will gradually replace "retail investors" in the A-share market and become the most mainstream investment force. Public funds can be expected to be the "backbone" of this force. However, at the same time, the domestic public funds follow the usual business development ideas, especially the formation of a set of playing methods to adapt to the local "retail market", which does not match the pace of the steady development of the capital market, which is also the main reason for the public funds to become an incentive for market stampede.

Nine suggestions on avoiding the extreme market caused by stampede in mechanism

1、 We should strengthen the education of investors and encourage long-term investment ideas

The concept of encouraging long-term investment should not be regarded as an empty talk. On the one hand, it is necessary to encourage the holders of public funds to have long-term investment ideas and behaviors. On the other hand, fund managers should be encouraged to pursue long-term performance rather than short-term performance ranking.

The redemption of a fund is highly related to the performance of the fund. It is understandable that investors want higher returns, so they hope to entrust their own funds to competent fund managers. However, it is unreliable to take history as a mirror when evaluating fund performance. On the one hand, short-term performance does not necessarily mean strong investment ability, and "lucky" fund managers can still occasionally achieve good investment performance; on the other hand, strong investment ability does not necessarily always mean good performance. Therefore, it is necessary to strengthen the education of investors and guide them to focus on the short-term performance of the fund to the long-term investment ability of the fund.

This group market exposed the domestic public fund managers chasing short-term performance and ranking, blindly group problem. The foundation people choose the so-called "cheaper" new funds and transmit pressure on the fund managers in the fund return rate.

It can be said that fund managers and fund managers will influence each other in terms of investment philosophy. Fund managers attach importance to performance ranking, which brings the idea of "making quick money" to the foundation people, and intensifies the purchase and redemption. However, the lack of long-term value investment philosophy will force fund managers to pursue short-term performance and ignore the long-term value depression layout.

2、 Strengthen the professional education of fund managers and strengthen their long-term and value consciousness

The collapse of the Baotuan market also exposed the immaturity of domestic public fund managers.

At present, the domestic fund managers have relatively short working years, and fund managers with more than 5 years' experience have already belonged to the senior level in the market. Overseas mature markets have relatively unwritten regulations, that is, fund managers generally need more than 14 years of capital market experience, that is, they have experienced two complete business cycles, and they are more calm about the sharp rise and fall of the market. In the face of extreme market environment, the mood fluctuation of domestic public fund managers is more serious.

In the future, public offering funds should be raised more according to the actual situation of the market and fund companies, rather than blindly launching new funds. Driven by the profit-making effect, public funds are lucky to follow suit. At the same time, fund companies should also strengthen the regulations on purchase and redemption, avoid large-scale redemption triggering stampede under extreme market conditions, and strengthen the education of retail fund investors. On the one hand, they should sort out the long-term investment concept, on the other hand, they should strengthen the risk awareness of high-level purchase funds.

3、 Standardizing the formulation of performance benchmark and strengthening the balanced development of fund industry

At present, some domestic public fund managers are consciously lowering the performance benchmark of fund products to highlight the performance of their own products. For example, the index yields with relatively stable stock prices such as CSI 300 and CSI 500 are quoted, or the index yields of various bonds and even the demand deposit interest rates of commercial banks are directly used as the performance benchmark. At the same time, it is also the objective reason that the investment style of fund managers is "unlimited", and a large number of funds are grouped into a single industry and a single hot spot.

Among the 1971 public equity open-end index funds in the whole market, 780 funds did not take the specific industry theme index as the performance benchmark, but adopted a certain proportion of single index yields such as CSI 300, CSI 500, CSI 800 and even the Shanghai Composite Index or gem index, combined with various deposit interest rates or bond index yields to form the performance benchmark of fund products.

In addition, 88 open-end index fund products only use the composite index which is not specific to specific industries as the performance benchmark. Among them, 22 fund products are based on CSI 300 index and 19 fund products are based on CSI 500 index.

From the above data, it can be found that, at present, the performance benchmark of some domestic equity mutual fund products is relatively low, and the formulation method is simple, and lacks the ability to adapt to market fluctuations. Compared with this kind of small fluctuation performance benchmark, the performance of related fund products will undoubtedly be magnified, which has played a role in inducing basic people's investment.

Therefore, the managers of public funds should be urged to establish performance benchmarks that meet the characteristics of fund products, and adjust the benchmark flexibly according to market conditions, so as to fully reflect the performance trend of products and avoid misleading the funders.

4、 Public funds should improve the quality of information disclosure, especially the mandatory disclosure of volatility and risk return indicators of public funds

Domestic public funds information disclosure system is relatively perfect, but compared with the mature market, there are still typical deficiencies.

For example, the domestic mutual fund products lack of disclosure on the volatility of fund net value and the risk return comparison index of fund net value, and the market lacks the comparison of unit income and unit risk of mutual fund products, which makes it impossible to realize the investment risk of public funds.

This is also the main reason for the mismatch between the income expectation of public fund holders and the fund products. It is suggested to introduce Sharpe ratio and other similar indicators to standardize the performance evaluation of mutual funds. Due to historical reasons, both public fund companies and domestic research institutions have "deliberately avoided" in this field, which is irresponsible for the long-term and stable development of the capital market and the investors' right to know.

Compared with the information disclosure quality of domestic mutual funds and overseas mutual funds, there are a lot of "routine" templates in the information disclosure of domestic public funds. In the regular reports of funds, there is a lack of effective information disclosure for investment style and position analysis. In particular, the basic information of fund managers, changes in scale, investment strategies, etc., follow the "empty talk" disclosure, and lack of effective information presentation, leading to the misunderstanding that "the foundation people do not understand the fund".

5、 Public fund products should be divested of institutional customers with more than 10 million positions

The development of domestic public funds has developed into a typical "tob" sales model through the "sales difficulties" before 2020. There are a large number of institutional clients among the holders of public funds, which leads to typical unfair consequences to ordinary investors.

In the fall of "Baotuan stocks" in 2020, some insurance institutions have announced that they have reduced their holdings of relevant funds after new year's day. However, there is no information disclosure system similar to the reduction of large shareholders of Listed Companies in public offering funds, which leads to the general holders unable to know the passive change of public offering fund positions caused by institutional clients' Redemption, resulting in their own rights and interests being damaged.

Due to the operational characteristics of mutual funds and the "institutional sales" ecology formed at present, institutional clients and mutual fund holders enjoy different investment advisory services, and there are a lot of information biases. Therefore, the market problems caused by "confusing" capital management are very significant.

According to the latest comparable data on the proportion of institutional positions, in the 2020 interim report, in the contractual open-end funds, the proportion of institutional positions exceeding 30%, accounting for about 50% of the total number of funds disclosed. The redemption behavior of institutional holders in public funds will cause great fluctuations.

At the same time, institutional clients enjoy different rates from retail investors when they apply for, subscribe for or redeem the fund, which also causes the instability and unfairness of the fund holder structure.

Therefore, it is suggested that public funds should limit the asset management business of institutional holders to the scope of special account business, and effectively protect the three principles of openness, fairness and transparency in the field of public funds.

6、 Classification and nomenclature of restricted public offering funds

On January 8 this year, China Securities Regulatory Commission (CSRC) officially issued "Several Provisions on strengthening the supervision of private investment funds", which specifically standardized the names of private fund managers.

That is: without registration, no unit or individual may use the words "fund" or "fund management" or similar names to conduct private fund business activities. The private fund manager shall indicate the words "private fund", "private fund management" and "venture capital" in its name, and indicate in the business scope such words as "private investment fund management", "private securities investment fund management", "private equity investment fund management", "venture capital fund management", etc., which reflect the characteristics of private fund management.

This is also the first regulatory requirement for the classification of private fund names, which undoubtedly helps to protect the interests of investors, let investors judge the types of private placement at a glance, and effectively prevent "pseudo private placement".

In my opinion, although the mutual fund industry is more standardized, it still needs to be restricted in the classification and naming of fund products.

Although more categories can meet more kinds of needs, it also makes it difficult for ordinary investors to distinguish which kind of fund they need. For example, the flexible allocation type in the mixed type has a great differentiation in style. Some funds used to play new funds, and later became stock funds. In addition, there are more special graded funds, some of which are open on a regular basis, and some are hedge funds. In this way, even professionals need to work hard to figure out the specific investment style and risk return characteristics of each fund, let alone ordinary individual investors with insufficient investment experience.

7、 Strictly limit the "innovation" of new funds, thus ignoring the trend of stock fund management

As of March 23, 33.99% of China's Stock Open-end funds with a scale of less than 100 million yuan accounted for 33.99%, while 23.65% had a scale of less than 50 million yuan.

This means that the market needs not a wide variety of products, but long-term stability (low return volatility) and corresponding fund products scattered at various risk points on the asset allocation line.

Take the performance of public funds in this "Baotuan" market as an example, whether it is fund products with big consumption theme, fund products targeting at small and medium-sized enterprises, or even fund products with science and technology in their names, the top ten heavy positions of which have a high degree of overlap. Baotuan stocks such as Guizhou Maotai are held by various theme funds, which is undoubtedly not conducive to the diversification of investors' risks 。

Therefore, the future supervision should further standardize and restrict the classification and naming methods of public funds, match the fund name with the investment target, and put an end to the investment behavior of "selling dog meat with sheep's head", so that investors can conveniently and intuitively purchase the industry target they want to configure.

8、 Adjust the rate of mutual fund appropriately to save the cost of investors

According to the "2018 development report of American investment companies" released by the Investment Company Institute (ICI), the rate level of mutual funds in the United States has decreased significantly in recent years. In 2000, the weighted average rate of the scale of equity funds was 0.99%, 0.83% in 2010 and 0.55% in 2018, a decrease of 44.4% compared with 2000.

At present, the average rate of management fee and custody fee of public equity open-ended funds in China is 0.87% and 0.15% respectively. Combined with the purchase and redemption fee, the cost of the investment fund is obviously higher for the domestic investors who hold the fund for a short period of time.

Of course, the capital markets in China and the United States are not the same. From the perspective of fund products, there are fewer stable large-scale fund products in China, the monopoly position of head fund managers on the market is not obvious, and the revenue of domestic fund companies is also more dependent on management fees. The recent emergence of "out of circle" of fund managers also shows that the effect of domestic star fund managers is still strong, hindering the decline of relevant product rates.

However, the more developed Internet institutions in China have also intensified the competition of fund sales commission.

We will encourage public funds to set their own rates and encourage a variety of fee structures and methods. However, the decline of service rate does not mean the decline of service quality. We should be more alert to the oligopoly of public fund industry caused by the rate war.

At present, the strength and business model of domestic public funds are not enough to enhance the wealth management function of a shares, and even damage the interests of individual investors. Domestic public fund industry policies and systems, as well as the company itself, still need to be continuously optimized to further improve the management level and service ability of fund management companies, so as to meet the strong demand for domestic residents' wealth growth and intertemporal high liquidity asset allocation.

9、 In terms of mechanism, public funds should be encouraged to increase the use of hedging tools

With the normalization of domestic stock index futures trading in recent years, the basis is constantly revised (positive expansion), and the public offering hedging products also begin to usher in the development period. By the end of 2019, the scale of public offering hedging products has increased to 16.7 billion yuan, a record high.

Public offering quantitative hedge funds perform well in volatile markets, but rarely use hedging strategies and tools in common stock and hybrid mutual fund products. Although compared with overseas mature markets, domestic financial hedging and short tools are still not rich, but there are still stock index futures, options, credit derivatives and other tools can be used.

Most of the domestic public fund products choose to allocate the bond products or monetary products with low risk to smooth the fund return. However, in most extreme market conditions, the market often encounters the double whammy of stocks and bonds, and the allocation of low-risk products can not play a role in hedging risks.

Therefore, from the long-term perspective of public funds to play the role of wealth management in the stock market, on the one hand, supervision should continue to enrich domestic financial hedging instruments on the premise of risk prevention.

On the other hand, public funds should be required to a certain extent to avoid the embarrassing situation of "no tools". As the manager of public funds, they should be vigilant, reduce the pursuit of short-term profit-making effect, and set aside a part of funds to guard against the possible extreme market.

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