Behind The Innovative High Of Northward Funds: The Strategy Of Group Heating Is No Longer Popular, And The Stock Selection Ability Is Facing The Big Test Again

With the continuous improvement of China's economy, the inflow of northward funds into the A-share market has reached new highs since this year.

According to the latest data released by Goldman Sachs, the net inflow of northward capital has reached about US $33 billion this year, about 95% higher than that of the same period last year, and has exceeded the net inflow of US $31 billion for the whole of last year.

Correspondingly, the proportion of foreign investors holding shares in the A-share market has also reached an all-time high of 4.5%, up from 3.6% at the end of 2019.

"Behind this is the close relationship between the long-term global investment institutions and the continued increase of positions in A-shares in the post epidemic era." A large-scale macro-economic hedge fund manager of Wall Street who involved in A-share investment disclosed to reporters. Since last year, many large global pension funds and fof institutions have increased their holdings of A-share assets in view of China's first stable and rebound economy, resulting in a growth of more than 30% in the scale of equity investment funds in Greater China that they are entrusted with.

According to the latest report released by Dongxing securities, the performance of northbound funds is also quite good: from 2015 to 2020, the annual compound rate of return of northbound funds reached 18.28%, outperforming 6.69% of CSI 300 index, 12.39% of gem, and 13.02% of equity funds.

Dongxing Securities believes that the reason why northbound capital can obtain considerable excess returns is mainly due to their industry selection and stock selection ability. As far as the industry selection is concerned, northward funding focuses on food and beverage, consumer service, household appliances, electronics, medicine and other industries. Through heavy positions in these industries, the yield of northbound capital is close to that of Baima shares, which is the top 10% of the market value of the industry, and the average abnormal return rate reaches 6.4%; As far as stock selection ability is concerned, northbound funds prefer to allocate heavy positions in Baima shares, the industry leader. By splitting the yield sources of northbound funds, 36.98% came from the market, 17.4% from industry allocation, and 45.62% from stock selection.

"However, since this year, there has been a significant differentiation in the investment strategy of northward funds." The big macro-economic hedge fund manager points out. In the near future, northward funds mainly flow to new stocks such as mid cap stocks, growth stocks, GEM stocks (technology stocks, industrial technology stocks), while the inflow of funds from blue chips (essential consumer goods, medical care) has slowed down significantly.

A person in charge of Hong Kong Private Equity Fund, entrusted to manage the A-share investment funds of several global pension funds, told reporters that behind this, it is the northward fund that has increased the allocation of ESG investment strategy. In addition to requiring the A-share listed companies invested to meet the relevant ESG conditions, the A-share listed companies that have invested must strengthen their own ESG information disclosure and ESG promotion ability. Due to the failure of some blue chips to disclose comprehensive ESG information, they can no longer be included in the stock pool by northward funds.

In his view, although the move makes northbound capital miss out on some blue chip investment opportunities, ESG investment will still create stable returns and stronger investment safety cushion. Throughout the European and American stock markets, listed companies that meet the requirements of ESG tend to be more resistant to falls during the stock market correction period, and are more likely to obtain capital favor and achieve greater growth during the period of stock market recovery.

With the continuous improvement of China's economy, the inflow of northward funds into the A-share market has reached new highs since this year. Visual China

A probe into the reasons for the influx of northward funds

The reporter has learned from many sources that the reason why the net inflow of northward capital has reached new highs since this year lies in the fact that China's economy has continued to improve and the fundamental support is that the valuation of a shares is generally low.

"Compared with the new high US stocks, a shares seem to be in the value depression." According to the above macro-economic hedge fund managers, since April, the market has been increasingly worried that the US Federal Reserve has tightened QE monetary policy ahead of schedule, which has led to a sharp correction of US stocks, and a large number of overseas investment institutions have increased their positions in a shares through the Shanghai Stock connect / Shenzhen Stock connect channel to hedge against the falling risk of US stocks.

He revealed that at present, most investment institutions on Wall Street generally believe that the net inflow of northward funds this year is expected to significantly exceed the average value of $39 billion in 2017-2020.

In addition to the massive inflow of northward funds into a shares, QFII / rqfii channel also attracts a large number of overseas long-term funds.

At the end of September last year, China Securities Regulatory Commission, the people's Bank of China and the State Administration of foreign exchange issued the measures for the administration of domestic securities and futures investment by qualified foreign institutional investors and RMB qualified foreign institutional investors (hereinafter referred to as the measures), which greatly relaxed the scope of QFII / rqfii investment and the convenience of capital in and out, attracting more and more overseas investment institutions to increase their positions in a shares.

"In particular, the measures delete statements such as the implementation of macro Prudential Management by relevant departments according to the situation, which will further dispel the concerns of overseas investment institutions about the easy entry and exit of funds, and attract them to increase the investment quota of a shares through QFII / rqfii channels." A major European asset management institution Asia Pacific chief representative pointed out. At present, the types of overseas funds entering A-shares through Shanghai Stock connect / Shenzhen Stock connect and QFII / rqfii are increasingly differentiated. For example, large overseas asset management institutions prefer to invest in a shares through QFII / rqfii channels, because QFII / rqfii allows them to invest in derivatives such as stock index futures and foreign exchange futures to hedge A-share holding risk, while overseas equity multi head hedge funds prefer to invest in a shares through Shanghai Stock connect / Shenzhen Stock connect, It mainly focuses on its more convenient capital cross-border settlement in and out process and nominal account mechanism.

According to data released by Goldman Sachs, foreign investors currently hold about $560 billion of China's A-shares through QFII, Shanghai Stock connect / Shenzhen Stock connect and other channels, far higher than the $82 billion at the end of 2014.

"We expect that as China's economy continues to improve, the A-share holdings of overseas investment institutions will exceed $600 billion by the end of the year." The chief representative of the Asia Pacific region of the above-mentioned large-scale European asset management institutions believes that. At present, global pension funds, which passively invest in A-shares following the weight of MSCI Emerging Market Index, have increased the proportion of Chinese stocks in emerging market funds to 1 / 3, while overseas fof institutions with active stock selection have increased the proportion of Chinese stock investment in emerging market investment to more than 50%; Considering that many emerging market countries are suffering from the impact of the new epidemic situation, and China's economic growth continues to "stand alone", the proportion of China's stock / emerging market investment of various overseas investment institutions will soon exceed 60%, and even China's stock will be allocated as a separate major asset.

Strategic differentiation triggers new challenges in stock selection

As the inflow of northward funds has reached a record high, their investment strategies are quietly diverging.

"Northbound funds have also noticed that they are too warm in groups, and there is a high risk of concentration of positions." The aforementioned macro-economic hedge fund manager told reporters.

According to the data, by the end of last year, the top 50 widely held listed companies in the A-share market accounted for about 45% of the total asset management of mutual funds. In contrast, the positions of northbound funds in these 50 listed companies are more concentrated, accounting for about 52% of the total value of northbound capital holdings.

"Therefore, many northbound funds are worried that the highly convergent industry allocation and stock selection strategy are leading to huge position concentration risk. Once some overseas investment institutions suddenly withdraw substantially, the sharp drop in the share price of relevant A shares will drag them to encounter a lot of risk of net worth fluctuation." He told reporters. This has driven northward funds to significantly increase the allocation of individual stocks in new sectors such as mid cap stocks, growth stocks and GEM stocks (technology stocks, industrial technology stocks).

"This poses a new challenge to our stock selection ability." The macro-economic hedge fund manager is blunt. After all, overseas long-term investment institutions don't like frequent trading (trading at the right time), but prefer to obtain stable and considerable returns through stock selection Trading (long-term holding of stocks). How to find high-quality stocks with long-term allocation potential in these new sectors is like testing the investment vision of northward funds from all walks of life.

He pointed out that the current stock selection pain point of northbound funds is that they generally lack of localized investment teams familiar with the A-share market. As a result, they can only judge the investment value of individual stocks through the reports of securities dealers, and can not investigate the growth potential of some listed companies on the spot, so they miss many investment opportunities for potential stocks.

"In addition, the ESG strategy also puts a lot of pressure on stock selection ability." The chief representative of the Asia Pacific region of the above large European asset management institutions said frankly. Due to the lack of comprehensive ESG information disclosure content of many A-share listed companies, northbound capital can not bring them into the stock pool, which also limits the scope of stock selection.

The reporter has learned from many sources that in order to attract the favor of northbound capital, many A-share listed companies that have obtained the investment of northbound capital are speeding up the improvement of the ESG information disclosure system, including the introduction of the ESG information disclosure standards of European and American listed companies in the same industry, so as to meet the selection criteria of overseas investment institutions.

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