This article is from WeChat public account: Guotai Junan Securities Research (ID: gtjaresearch) , author: monarch fund research team, head of FIG sources ： 图 虫

Achieved 121.69% of revenue in one year. This is the transcript of the top Chinese public fund in 2019.

In fact, this is not the case.

In the arena with more than 2,200 stocks and mixed public funds, In 2019, the average return of ordinary stock funds reached 47.33%, and the average return of partial stock mixed funds 44.96%.

This performance is not only better than most retail customers, but even outperforms all mainstream market indexes, including the GEM index.

It is no wonder that as soon as the year 2020 begins, explosive funds of the Xinfa Fund will appear frequently, and funds will flow into the public fund industry of Ganhanfenglin like a tide.

However, there are always worries under the glorious scene. Fund investors ca n’t help but ask, Who should the outstanding performance of public funds last year be attributed to? Is it the market itself, or is it a style feature, or is it a fund manager’s stock selection ability?

More importantly, after the fund year, are these results sustainable? What kind of fund should Jimin choose to start with?

The Guotai Junan Fund research team used professional quantitative models to attribute the performance of public funds, and made predictions about what kind of stock funds to buy in the future in an attempt to find the most anticipated fund products in 2020.

How to measure what money the fund actually makes?

After the silence of 2018, the A-share market has picked up in the first half of 2019, starting a comprehensive rise. In the second half of the year, market hotspots appeared frequently, showing a structural bull market, and each index showed performance.

The structured market has created opportunities for active management funds to obtain excess returns.

In 2019, the average cumulative returns of stock funds and hybrid funds were 45.18% and 34.48%, respectively. In the same period, the Shanghai Stock Exchange, Shanghai Stock Exchange, Shenzhen Stock Exchange, Shanghai Stock Exchange, Shanghai Stock Exchange, and ChiNext Index rose 40.99%, 36.07 %, 27.51%, 43.79%, and 41.03%.

The average level of equity funds outperformed all indexes, which is rare in history.

The performance of stock funds and hybrid funds in 2019, source: Guotai Junan Securities Research, Wind

From the perspective of absolute returns, the public offering funds in 2019 have also achieved excellent investment performance, and the strongest products have even doubled their net worth in a single year.

The next question investors are most concerned about is whether strong earnings performance can continue in the future?

To answer this question, we must first clarify the source of income by attributing the performance of the fund, and find out whether the source of income of the public fund last year was the beta income of the market, or a certain style, or the fund manager Outstanding stock selection ability.

Only by understanding the source of income can we determine the sustainability of the fund’s future performance.

We first use the improved Fama-French three-factor model proposed by Andelidis et al. (2013) to analyze the source of income of the fund.

The main difference between this model and the traditional three-factor model is the importance of the fund’s own performance benchmarks in performance attribution.

Due to the increase in the issuance of various thematic funds, the importance of performance-based fund evaluation systems has become increasingly prominent. For example, the benchmark for the performance comparison of funds with the investment theme of innovation and technology is the CSI TMT industry theme index. This index has a certain small cap and growth style exposure compared to the CSI 300 index itself.

So if you ignore the differences between funds and use the same factor model for time series regression, it will inevitably lead to biased results.

The core changes that determine fund performanceYet?

We use the daily frequency fund income data of the quarterly cycle to attribute fund returns since 2007. We found that from 2013 to 2016, due to the obvious market small-cap style, the scale factor continued to contribute positive returns. Other factors are difficult to form a stable source of income.

In addition, it is not difficult to observe the performance of Alpha, which is the excess return of the fund. This value has been around the zero axis for a long time.

However, in the third and fourth quarters of 2019, the average Alpha performance of the fund was considerable, indicating that the fund managers in the second half of 2019 took advantage of their stock selection capabilities and achieved returns exceeding the benchmark portfolio.

Further, when we observe the relationship between the fund’s Alpha earnings and the original earnings in the four quarters of 2019, there are obvious differences in the performance of the four quarters.

In the first quarter of 2019, due to the rapid upward movement of various market indexes, there was no obvious correlation between Alpha’s returns and the original returns of the fund, but from the first quarter to the fourth quarter, the correlation between the two gradually increased .

Especially in the fourth quarter, there is a clear linear correlation between Alpha’s returns and original returns—in other words, the fund manager’s stock selection ability at this time label = “Remarks”> (Alpha) is the decisive factor for its performance.

The relationship between Fund Alpha and original earnings in the four quarters of 2019, data source: Guotai Junan Securities Research, Wind

Summarizing the above results, we have come to the conclusion that: in the structured market, the fund manager’s stock selection ability is becoming a more and more decisive factor in fund performance.

The market is structural in the second half of 2019In the bull market, good companies in various industries are in full bloom, providing fund managers with a stage to fully display their stock selection capabilities.

How to find a fund manager with continuous stock selection ability?

Since the ability to select stocks is the core of determining fund performance in the structured market, how to find trustees with such capabilities among the many fund products and fund managers in the market is what fund investors are most concerned about next problem.

Under the fund evaluation system relative to a given performance benchmark, the deviation of the fund manager’s holding portfolio from the benchmark portfolio reflects their investment decisions for private information.

Deviating from the benchmark portfolio means taking proactive risks. In view of this, Petajisto (2013) has established an active shareholding indicator for all fund positions in the fund (Active Share) to measure the deviation of fund holdings from the benchmark portfolio.

According to this paper’s empirical research on the active management of funds in the United States from 1999 to 2009, it is found that active shareholding has a significant predictive effect on the excess returns of the fund.

If we look at the average active shareholding level of China’s stock and hybrid funds, we find that the overall proportion of active shareholding of public funds is high, which has been maintained at more than 80%. The process of rising and then falling.

Time series fund average Active Share performance, data source: Guotai Junan Securities Research, Wind

We have also examined the active shareholding portfolios andThe relationship of its subsequent excess earnings Alpha.

Statistics of correlation coefficients between ActiveShare and Alpha, data source: Guotai Junan Securities Research, Wind

From the time series perspective, there is a dynamic change in the relationship between active holdings and excess returns of Chinese funds.

Before 2015, there was no significant correlation between the two, and by the second half of 2015, there was even a significant negative correlation between the fund’s active holdings and excess returns-which means that at the time The active risk assumed by the deviation of the fund’s holdings relative to the benchmark did not bring excess returns to the fund, but was counterproductive and hurt the fund’s returns.

However, with the development of the public equity management industry, since the second half of 2017, the relationship between active management and excess income has reversed, changing from a significant negative correlation to a significant positive correlation.

The potential implication is that the active management level of fund managers has undergone a qualitative change. Fund managers with the ability to choose stocks have realized value appreciation through active management, thereby increasing returns for investors.

We believe that this change is related to the weakening of the small cap effect since 2017. Due to frequent market style switching, long-term effective Alpha factor mining has become more difficult, and increasing competition in the industry has promoted the advantages of managers who truly have the ability to choose stocks.

In order to interactively verify the above results, based on the stock positions disclosed in the 2019 Interim Report, we extracted funds with Alpha above the top 20% quantile in the second half of 2019 to calculate the industry distribution of active positions.

On average, the top three CITIC Tier 1 industries that are most over-allocated by these funds are distributed as electronic components, computers, and pharmaceuticals, which is also the industry style with relatively outstanding performance in the second half of 2019.

The stock selection ability excellence fund is over-equipped with the technology and medical sector. Data source: Guotai Junan Securities Research, Wind

In other words, since the stock selection ability of active fund managers in our country is improving, if we judge that the structural bull market in the next stage will continue, we should try our best. Fund managers who have proven their ability to choose stocks over the years to invest.

Floating rate products provide downstream protection for active management

In the field of actively managed funds, there is another potential benefit worth paying close attention to.

At the end of 2019, floating-rate products were reopened. Based on the “Guidelines for the Collection of Floating Management Fees for Publicly Raised Securities Investment Funds (Draft)” issued earlier by regulators, floating management fee funds can be divided into different charging methods. Two categories:

The first is a “fulcrum” floating management fee fund.

The actual remuneration received by the fund manager (management fee) is directly linked to the performance of the fund. When the performance of the fund is higher than the performance comparison benchmark When the fund’s performance is lower than the performance comparison benchmark, the management fee rate fluctuates downward.

The second is to extract a “performance compensation” floating management fee fund.

Based on a fixed management fee charged by the fund manager, when the fund’s performance exceeds a preset benchmark, an additional management fee is charged in accordance with a certain percentage of the excess income.

According to the fund prospectus issued by the six approved public offering funds, the floating rate products listed this time belong to the category of extracting “performance compensation” floating management fee funds.

Specifically, the fund’s management fee rate is divided into two parts. One is a relatively fixed part with a relatively low proportion. At present, the rate of this part of several funds is an annualized rate of 0.8%. The other part is based on the fund. For the performance performance extraction, the portion exceeding the annualized comparison benchmark of 8% will be subject to a 20% performance compensation based on the size of the redemption share.

Since the floating rate products currently being issued are hybrid funds, the fixed management fee charged by the vast majority of these products in the market is an annualized 1.5%, which means that fund managers must achieve an annualized 12% Only in order to achieve the original fixed management fee rate, more than 12% of annualized income, in order to achieve the purpose of improving performance compensation.

Floating management fee rates help to form a stronger incentive for fund managers and obtain higher performance returns through excellent performance. The original intention of this mechanism was to optimize the principal-agent relationship between fund managers and investors, and better bind the interests of the two together.

However, whether the floating management fee model can make real profits for investors is not the same.

From the perspective of investment behavior, there have been discussions in the academic community about the fund’s flow of funds—the asymmetry in performance that has caused fund managers to take excessive risks.

This is because the inflow of funds attracted by improved performance is significantly greater than the outflow of funds caused by lower-than-expected performance at the same level. In the case of asymmetric rewards and punishments, it may induce fund managers to take excessive risks, or “bet style” The short-sighted behavior is actually unfavorable to investors and even deviates from the investment goals agreed in advance.

The floating management fee model for extracting performance compensation potentially aggravates this asymmetry in rewards and punishments, leading to external investors ‘concerns about fund managers’ excessive risk-taking behavior.

But it is worth noting that the product that was re-opened this time has set a minimum holding period, which lengthens the performance evaluation period of fund managers, which helps alleviate the pressure and corresponding risks of fund managers on short-term performance rankings. The incentives provided allow fund managers to better execute investment strategies and focus on the long-term appreciation of assets.

In addition, as the first batch of declared products after the opening of the gate, fund managers and corresponding products are also a process of self-selection for fund companies. Due to the retrospective consideration of their own historical performance, fund managers have short-sighted behavior. Incentives are also relatively limited.

After extracting performance rewards, whether or not active management products are “cost-effective” for investors may also depend on the market environment. In bear markets and shock markets, A-share actively managed funds can outperform the corresponding index to obtain excess returns, while in a bull market, actively managed funds lack relative advantages.

Based on the performance of stock and hybrid funds in the A-share market since 2010, and the five major broad-based index returns over the same period, we will separate the median performance of various funds. The number is extracted and compared with the representative index to observe the changes in the relative advantages of the active management relative to the passive index in different market environments.

In the 2015 unilateral bull market, floating rates have a greater impact on the relative returns of the fund; data sources: Guotai Junan Securities Research, Wind

According to the calculation method of the performance commission of the floating management fee fund reported this time, 20% of the performance commission is drawn for the income exceeding 8% of the fixed annualized rate. We calculate the deduction of the floating management fund based on the algorithm every year Revenue after rate.

It is not difficult to see that In bear markets and shock markets with weak index performance, most active management funds can obtain excess returns from the relative index, and because the returns are difficult to reach the annualized threshold of 8%, the performance commission This cannot be achieved, and lower management fee rates can also help increase fund returns.

In 2014 and 2015, when the index performed strongly, most active funds underperformed the index. In this case, performance compensation will increase the distance between the performance of the active fund and the index.

If analyzed through this simple scenario assumption, on the whole, China’s A-share marketMost of the active management funds can outperform the performance benchmark to obtain excess returns. The floating management fee rate helps investors save certain management cost costs in a bear market, but it also weakens certain returns in a bull market, and the market shock situation is even more severe. Depends on the capabilities of the fund manager.

From the perspective of fund companies, they are more inclined to issue floating rate products at the bottom of the market, so as to fully capture the dividends in the upward process of the market.

The above content is selected from the research report “public offering 2020: things you should know in addition to performance rankings” and public information published by Guotai Junan Securities, and the specific analysis content (Including risk reminders, etc.) Please see the full report for details. If there is any ambiguity due to the abstract of the report, the full report content shall prevail.
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Huang Wanxuan (Analyst) S0880518110002

Zhu Renmu (Analyst) S0880519070001

This article is from WeChat public account: Guotai Junan Securities Research (ID: gtjaresearch) , author: monarch fund research team