Investment Insights from Mutual Fund Q3 Reports

Having traversed the "epic" rebound at the end of September and the beginning of October, the A-share market, after experiencing the exhilaration and subsequent cooling of rapid fluctuations, has now transitioned from the first phase of "blitzkrieg" to the more protracted "tug-of-war" in the second phase.

As October draws to a close, with the collective disclosure of the third-quarter reports of funds, new clues about capital flows are gradually emerging, in addition to the market's widespread focus on fundamentals and policy trends.

As the new cycle of Chinese assets is "to be continued," the marginal changes in this first regular report after the market's recovery may provide clearer guidance for the future structural direction of the market.

So, what were the significant trends of public funds in the third quarter? What investment clues were revealed in this third-quarter report? Keep reading as we delve into the details.

Clue 1: The Tide of the Times

Passive index funds are becoming a major trend.

As of September 30, 2024, the total scale of public funds reached 32.07 trillion yuan, setting a historical high for the fifth time this year, "clinching" the position of the main force in China's asset management market. Among them, equity-type funds have become an important source of growth.

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In fact, with the "lightning recovery" of the stock market in the third quarter, the landscape of public equity funds has also undergone a transformative reshaping. Compared to the somewhat "hesitant" redemptions and subscriptions of active equity funds, passive index funds are rapidly rising on the tide of the times.

By the end of the third quarter this year, the total value of stock ETF assets reached 2.7 trillion yuan, growing by more than 50% compared to the end of the previous quarter.In the category of equity-oriented public funds (actively managed equity funds + passively managed index funds), passively managed index funds hold a market value of A-shares that accounts for 51.1%. For the first time in history, the scale of A-shares held by passive equity funds has surpassed that of actively managed equity funds.

In fact, drawing on the experience of overseas mature markets, it may be a general trend for passive investment to compete with active investment on an equal footing. Since the comprehensive implementation of the registration system in the A-share market last year, the phenomenon of market index increases rather than widespread individual stock gains has become more common, with the market style increasingly favoring index trends.

For example:

Since the beginning of the year, the full-year gains of the Shanghai Composite Index and the CSI 500 Index have been 10.9% and 14.1%, respectively, but the median return of individual stocks is still -6%, indicating that some accounts may still be a certain distance away from breaking even.

Since the start of this rebound on September 24th, the STAR 50 Index has rebounded significantly by 54.1%, but only 770 individual stocks have managed to outperform this increase, accounting for less than 15%.

Carefully considering the various market signals this year, whether it is the official announcements of large funds increasing their holdings in broad-based ETFs or the continuous influx of funds into index investments, taking advantage of market bottoms, after the scale and quantity of domestic stock ETFs have repeatedly reached new highs, the information contained within is worth deep reflection for every investor.

Clue 2: The Return of Consensus

The concentration of holdings in active funds has risen again.

Since April of this year, with the implementation of China's third "Nine Articles" in the capital market, there has been a significant shift in the investment paradigm of the market.When the emphasis on shareholder returns becomes a top priority, and when investments return to performance-driven and prosperity-seeking patterns, value investing and fundamental aesthetics gradually make a comeback. High-quality large-cap leading stocks regain valuation premiums, and some representative individual stocks hit new historical highs.

Since the beginning of the year, among the 31 first-level industries of Shenwan, the industry leader portfolios composed of the top five market value companies have all outperformed the industry as a whole.

As funds entering through ETFs flock to large-cap leading individual stocks, the concentration of holdings in public active equity funds has also reversed since 2024, shifting from "sinking and dispersion" back to "consensus and concentration."

After stabilizing and rebounding in the first quarter of this year, the concentration of fund-heavy stock holdings continued to rise for two consecutive quarters. Compared to the end of the second quarter, the proportion of the top 100 heavy stocks held by actively biased stock funds in the third quarter increased from 57.1% to 57.4%, and the proportion of the top 50 increased from 44.8% to 51.5%, indicating that the trend of funds favoring leading stocks has not ended.

At the same time, the money-making effect of fund-heavy stocks continues to rebound, with the average return of the top 50 heavy stocks in the second quarter of 2024 reaching 12.0% in the third quarter of 2024.

Looking at the industry layout, in the third quarter, funds overall increased their allocation to power equipment and new energy, non-bank finance, automobiles, and real estate, while the proportion of public utilities, non-ferrous metals, and petrochemicals decreased the most. Compared to the strategic layout during the market downturn, this adjustment has quietly revealed subtle changes in the investment direction.

In fact, everything has a cycle, and the style of market pursuit will always fluctuate between "market value sinking" and "beauty in size." From core assets to growth tracks, from small and micro-cap stocks to dividend dividends, there is no eternal king in the stock market, nor is there a permanent loser; the mean will always return. The so-called opportunities are often attributed to hindsight, and a journey of a thousand miles often begins with the most basic "cheap and cleared."

The Wind Golden Warehouse 50 Index, which represents the overall performance of fund-heavy stocks, currently has a TTM P/E ratio of only 12.6 times, at the 13% percentile point in the past five years. Compared to the Wind All A (TTM P/E ratio of 18.5 times), it has shifted from a valuation premium at the beginning of 2021 to a clear discount.

Whether you are full of faith or doubts at the moment, after three years of decline, some high-quality institutional heavy stocks have become cheap chips, "only undervalued, no overvalued." In the second phase of the market, the pattern of "weight setting the stage, and the vanguard performing" should also be believed.Clue 3: The Rise of "Dual Innovation"

Increase in Positions in ChiNext and STAR Market

In the third quarter of this year, public mutual funds have reduced their positions in the mainboard while increasing their holdings in "Dual Innovation".

By the end of the third quarter, the market value of A-shares in the mainboard held by funds accounted for 69.3% of the total, a decrease of 3.5 percentage points compared to the end of the second quarter; while the ChiNext board accounted for 20.0% (an increase of 2.5 percentage points), and the STAR Market accounted for 10.7% (an increase of 1.0 percentage point). (Source: Haitong Securities)

If the essence of the ChiNext board is "high-quality growth"—

After nearly fifteen years of development, the ChiNext board has become an important concentration of China's technological innovation enterprises. The industry distribution is mainly in fields with high demands for technological research and manufacturing, such as new energy, pharmaceuticals and biology, and electronics, supported by nine major strategic emerging industries, and is rich in innovative genes.

Then the label of the STAR Market is "hard technology"—

Since its inception five years ago, the STAR Market has always been tasked with tackling "bottleneck" technological challenges, committed to promoting China's self-reliance and strength in technology. Especially after the 20th National Congress last year put forward the concept of "safety and development in tandem," the future opportunities of the STAR Market have attracted widespread attention from the market. Against the backdrop of gathering a large number of cutting-edge technology industry clusters, the STAR 50 and STAR 100 indices have thus been in the spotlight.

Looking at the chip structure, the main broad-based indices with strong vibrations in the past three years are mainly in the Dual Innovation sector, with the ChiNext Index, STAR 50, and STAR 100 and other related indices experiencing maximum drawdowns of around 50-60%. As assets with high elasticity and strong beta, they are naturally more affected when there are economic expectation disturbances and tightening of overseas liquidity. However, after several rounds of adjustments, multiple pessimistic factors have been overpriced, and it may be for this reason that the ChiNext and STAR Markets have shown a "leading" performance in recent rebounds.

From a broader perspective, China's economy is currently at a critical period of transitioning towards innovation-driven and high-quality development. As traditional engines gradually fade, new productive forces represented by "high-quality growth" and "hard technology" are emerging, becoming the main thread leading the rise of a new economic cycle.As the high-level tone has set with the phrase "Advancing Chinese-style modernization, science and technology must take the lead," the dual-creation sector thus possesses a distinct sense of the times, becoming an asset that marches in step with the era. It is believed that among them, there will inevitably emerge towering giants, allowing investors' confidence and perseverance in the capital market to bear fruit.

Let's conclude our discussion on the topic of the third-quarter fund reports here. As all the clues gradually become clear and the signal lights of the new cycle begin to light up step by step, at this moment, being full of confidence and patient waiting might just be the most precious chips we hold in our hands.

Lastly, I wish everyone smooth sailing in their investment and financial management endeavors.