U.S. equity public offerings “perspective” S&P 500 index is difficult to surpass the main force of ETF products as the basis of stocks

   At the end of June this year, the scale of China’s public funds reached 22.3 trillion yuan, the highest level in history. In comparison, according to the American Fund Industry Yearbook, at the end of 2020, the size of US mutual funds was 25.7 trillion US dollars. Taking into account that the per capita GDP of China and the United States will also be 68,300 yuan and 69,400 US dollars in 2020, the ratio of fund size to per capita income is between 3 to 4 times in terms of local currency.
   However, there are huge differences in the investment development path of Chinese and American public (mutual) funds. The remarkable point is that in more than three years, most active management funds in the United States have difficulty beating the S&P 500 index. From the perspective of public offerings in the United States, the indexation trend of mainland equity products may become the mainstream in the future, and the annual average return may further move closer to mainstream indexes such as the Shanghai and Shenzhen 300.
  
Performance determines the direction of development

   Analyzing public funds in the United States, I have to mention the ten-year gambling agreement between Buffett and hedge fund manager Ted Seides. In fact, when Buffett proposed this bet, only this manager was willing to stand up and accept the challenge. It can be seen that most people were not optimistic about the results of active management in advance. In contrast, China’s active equity funds have always been able to significantly surpass the performance of the CSI 300 or CSI 500 index.
   Based on the above-mentioned reality, ETF funds have become the absolute main force among American mutual funds, especially stock products. According to Morningstar statistics, as of the end of 2019, equity funds accounted for 30% of the US$21.3 trillion mutual funds, or US$6.39 trillion, of which US$4.4 trillion was ETF funds. By September 2020, the scale of US ETFs has rushed to the 5 trillion dollar mark.
   According to flush data, from January 1, 2011 to December 31, 2020, the CSI 300 rose only 66.59% during the period, and the China Securities 500 Index rose only 28.97%. However, for the 631 domestic funds with data records during the same period, as many as 497 products outperformed the CSI 300 (including part of the debt base), and 611 products outperformed the CSI 500!
   China’s fund industry chooses to issue more active equity, after all, such products contribute the most to the company. According to the data released by the China Foundation Association as of July this year, the share of equity funds is basically the same as that of US funds, reaching 32.6%. However, my country’s ETF funds account for only 6.34% of the total share, and their net value is even lower, only 5.67%. In addition, data as of the end of 2020 show that equity index funds account for only 19% of equity funds, which is far lower than the 66.67% in the United States.
   In terms of the composition of ETF funds, China and the United States are also quite different. As of the end of 2020, nearly 63% of ETFs in the United States track broad-based indexes such as the S&P 500, and industry and thematic ETFs account for only about 10%. In contrast to domestic index funds, the scale of broad-based index products accounted for about 40%, and the scale of industry and thematic index products accounted for about 44%. The two are basically the same.
   After the US mutual funds struggled to beat index funds in active management, their development thinking and development direction also made major adjustments: that is, they began to issue more fund products with increased leverage for indexes, such as double S&P 500 funds and triple Nasdaq funds. At the same time, it also launched a large number of quantitative hedge strategy funds. In addition, U.S. mutual funds have developed many index funds that invest in emerging markets, and have developed many non-securities investment funds, such as investing specifically in gold, crude oil, and cryptocurrencies.
   At the same time, the number of mutual funds in the United States has remained stable in recent years: under about 500 to 800 new funds per year, most of the liquidation and acquired funds have also remained at this level, so the total amount has not changed much.
The size of a single fund has increased greatly and management costs have continued to fall

   In this context, the management costs of the US fund industry have been declining in recent years. This is because there are many fixed costs in the operating fund, such as audit fees, custody fees, and even investment and research teams, office space, etc. Basically these costs are relatively fixed within a certain period of time, while management fees are proportional to scale . This means that the larger the scale, the lower the cost allocated to each fund. Therefore, many managers have reduced the ratio of management fees to fund holders.
   Judging from the current fee situation, the fee rate of US index funds has been as low as 0.015% to 0.04% (management fee plus custody fee, the same below), while the fee rate of domestic index funds is between 0.2% and 1%, with an average level of 0.65%, which is 23 times the average charge level of the same kind in the United States. One of the important reasons is that the average size of US index funds is more than 20 times that of domestic ones. The expense rates of equity, hybrid and bond funds have also been declining with the expansion of scale. In particular, the rate of equity funds has fallen the fastest, from 1% in 2000 to only 0.6% at present.
   In addition, at the end of Obama’s term, the US Department of Labor issued a regulation requiring investment advisers to select funds for investors’ retirement accounts as “trustees,” which means investment advisers must put the interests of clients first. The reason is that in order to get more agency commissions, some fund sales channels continue to guide the basic citizens to sell the old and buy the new. After the introduction of the new regulations, it means that fund sellers such as investment advisers can no longer do this kind of business that runs counter to the interests of investors.
   In order to comply with the new regulatory requirements, many investment advisory companies have begun to introduce a fixed percentage of profits, which means that sellers such as investment advisors must work hard to find and recommend the best products for customers, further reducing the transaction costs of fund holders.

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