Fee rate reform reshapes public funds: Top-performing talents "flock to private funds", and the "passiveization" of products accelerates | Jinkei·Finance

Author | Wang Hanyu

Editor | Huang Yida

The public - offering fund industry is finding it increasingly difficult to retain outstanding fund managers.

In July, after the second - quarter reports of fund companies were disclosed, while the industry as a whole reached new highs in terms of talent and management scale, individual fund investors continued to withdraw from actively managed equity funds, and more star fund managers accelerated their departure from the industry.

On July 17, another well - known fund manager left his position. Anxin Fund announced that Zhang Yifei left the company on July 15 due to personal reasons. It is reported that he will join the private - equity fund industry next.

This is the 197th fund manager to leave the public - offering fund industry this year, while 357 fund managers left the industry last year.

The fee reform has changed the once "recession - proof" business model of this high - paying industry. Under the floating - fee system, the assessment criteria for fund managers are more detailed and stricter, which will also lead to more conservative and homogeneous actively managed products in the public - offering market in the subsequent period. Some high - performing managers may not be able to continue their previous styles and may turn to more flexible asset - management fields.

Style Constrained, Unpromising Future

Judging from the post - departure destinations of many public - offering fund managers, joining asset - management institutions or private - equity funds is the mainstream choice.

Before Zhang Yifei of Anxin Fund left, well - known fund managers such as Bao Wuke of Invesco Great Wall, Zhou Haidong of Huashang Fund, and Cao Mingzhang of China Europe Fund also announced their departures this year. It is rumored that many of them will join private - equity institutions. In addition, Zhang Kun of E Fund stepped down from his position as deputy general manager in May this year and has since focused on investment management.

In an open letter to investors, Zhang Yifei said, "I will continue to engage in the asset - management industry" and "serve and interact with everyone in a long - term, risk - friendly, cumulative, and stable absolute - return investment manner." Wind data shows that before his departure, Zhang Yifei managed a total of 9 funds with a total management scale of over 30 billion yuan. All 9 funds under his management had positive returns during his tenure, and 5 of them had returns of over 30%.

The large - scale shift of high - performing managers from public - offering to private - equity funds indicates to some extent that the risk appetite and management flexibility of the public - offering fund industry limit the performance of some fund managers. How to retain talent through appropriate and compliant compensation incentives has become an urgent challenge for fund companies.

The previous wave of managers moving to private - equity funds quietly started during the bull market in 2020. Fang Yi, who had worked in the investment and research department of a fund company for nearly 20 years, rising from a fund manager to the management level, also left the public - offering fund industry at that time and now leads secondary - market investment at a private - equity fund. He told 36Kr that the core reason for his decision to move from public - offering to private - equity funds in his 20th year of work was freedom.

"The advantage of working in a platform (public - offering fund company) is that there are abundant resources. However, we are always just a part of the platform, and it is difficult to lead the development direction of the entire team. For example, if you believe in value investing, whether the entire team can adhere to the value - investing direction is not actually up to you."

A group of fund managers represented by Fang Yi moved to private - equity funds to break free from platform constraints and conduct investments within a more flexible framework. This flexibility stems from the different risk - control and compliance standards implemented in the private - equity fund industry compared to the public - offering fund industry. Similarly, the large - scale wave of departures from public - offering funds that has continued from the second half of last year to this year has also been affected by the industry's fee reform and performance - assessment adjustments.

On May 7 this year, the "Action Plan for Promoting the High - Quality Development of Public - Offering Funds" (hereinafter referred to as the "Action Plan") was released, stipulating that fund managers' compensation should be linked to performance. Looking back further, the new "Nine - Point Plan" released in April last year foreshadowed the trend of "salary caps" in the public - offering fund industry, and the China Securities Regulatory Commission launched a fee reform in July 2023.

Even earlier, from 2019 to 2021, with the rise of Internet sales channels, public - offering funds launched a "star - making campaign" with a focus on traffic. When talking about that period, a currently - employed fund manager mentioned that it was a realistic expectation for those who had been in the industry for a few years to earn a million - yuan annual salary. "If you work in a large fund company, manage a decent - sized fund, and achieve good performance, you should be able to earn three to four million yuan a year (including bonuses). Star fund managers can earn over ten million yuan."

The advancement of the fee reform has completely changed the situation where fund companies used to charge management fees at a fixed rate. Specifically, the "Action Plan" requires that for fund managers whose products' performance has been more than 10 percentage points lower than the performance benchmark for over three years, their performance - based compensation "should be significantly reduced"; for fund managers whose performance significantly exceeds the benchmark, their compensation can be reasonably and moderately increased.

From the previous reduction of fixed fees to the current break from the "recession - proof" model, the ceiling for fund managers' compensation has visibly decreased. The adjustment of assessment details made by fund companies in line with the "Action Plan" has objectively further restricted the performance of some fund managers. According to 36Kr, the assessment details of each fund company vary, but generally speaking, the rules are more detailed and there are more indicators than before, such as setting performance benchmarks, increasing the proportion of long - term return assessment, and assessing the profitability of individual fund investors.

Both Fang Yi and the aforementioned fund manager believe that this trend will force some fund managers to abandon their previous investment styles. For example, those who invest in growth stocks are likely to have dismal performance in the past two years and fail to meet the assessment criteria; those with a high - risk appetite or a tendency to take big bets will also face salary cuts during the downturn due to excessive style drift.

"Due to these restrictions, some people have left the public - offering fund industry. Some have joined private - equity funds, some have joined asset - management companies, some have started managing their own money, and some have entered the education and training industry," Fang Yi said.

The Public - Offering Fund Industry Enters the "Passive" Phase

For fund managers who still remain in the public - offering fund industry, they will face the embarrassment of passive redemptions in the short term. In the long - term, the entire public - offering fund market may see funds concentrating in leading institutions and products moving towards passive management.

Currently, actively managed equity funds are facing significant redemption pressure. The second - quarter reports of funds show that as of the end of June this year, the management scale of public - offering funds reached 34.05 trillion yuan, hitting a new high. At the same time, the scale of actively managed equity funds continued to decline, reaching 3.41 trillion yuan at the end of the second quarter, a slight decrease of about 40 billion yuan compared to the end of the first quarter. Three years ago, at the end of the second quarter of 2022, it was 5.43 trillion yuan.

Meanwhile, individual fund investors have flocked to bond funds, money - market funds, and passive index products in large numbers. In the second quarter, bond funds received a net subscription of 459.2 billion shares, with a subscription ratio of 5.17%; money - market funds received a net subscription of 887.6 billion shares, with a subscription ratio of 6.88%. As of the end of June, the total scale of ETFs reached 4.31 trillion yuan, a 13.42% increase from the previous period.

Actually, since the "September 24th market" last year, the performance of actively managed equity funds has improved to some extent. According to data from Fullgoal Star Investment Advisor, in the second quarter of this year, about 45% of products had single - quarter returns in the 0% - 5% range. However, the general consensus among individual fund investors is that they have "lost money for three years." According to Wind data, as of September 23, 2024, among the 2,077 stock - type funds with available data, only 94 had positive returns in the past three years, accounting for only about 4.53%.

Therefore, after the "September 24th market," even though there is a structural market and the money - making effect has increased, individual fund investors are more inclined to wait until they break even and then leave the market. Fang Yi also predicts that in the short term, the public - offering fund market will still see "the higher the net value, the more redemptions." He admitted that "the market has suffered heavy losses in the past three years," which has led to a significant lack of confidence among individual fund investors in actively managed equity funds.

In the long - term, linking fund fees to performance will also encourage investors to shift from "chasing short - term returns" to "focusing on long - term returns." This may lead to changes in the market, such as the concentration of advantages in leading institutions and the dominance of passive products.

Previously, international experience has shown that the floating - fee mechanism usually leads to a significant increase in industry concentration. Leading companies, with more comprehensive risk - control systems, are more likely to maintain fee stability during market fluctuations. For small and medium - sized institutions, frequent fee adjustments due to performance fluctuations may further increase the pressure of product redemptions.

For example, among the first batch of 26 floating - fee funds under the current public - offering fund fee reform, the fundraising scale of products from leading companies was significantly higher than the industry average. The average fundraising scale per product was about 1 billion yuan, much higher than the average of 440 million yuan for actively managed equity funds this year.

Moreover, with the refinement of assessment criteria and the loss of high - performing talent, the public - offering fund market is likely to be dominated by passive products in the future.

The aforementioned fund manager told 36Kr that the safest strategy for him to adapt to the new assessment mechanism is to obtain some excess returns without chasing high - elasticity returns.

"If the short - term performance surges, unless I can completely exit at the peak, the performance is likely to decline later. This will inevitably lead to a large number of retail investors rushing in to buy when the short - term net value performs well, and then they will lose money when the performance declines. Ultimately, this will result in a poor performance in the 'profitability of individual fund investors' indicator." He further explained.

Fang Yi also predicts that in the future, most fund managers will closely follow the performance benchmark without making large deviations, aiming for stable and improving performance to ensure stable salaries. As a result, the products of each company will lose their obvious style differences, and "actively managed equity funds may become more like index - enhanced products."

Referring to the development path of the US mutual - fund industry, it entered the "passive" phase after the 2008 financial crisis. At that time, the actively managed products of US mutual funds underperformed the index for a long time, and many leading fund managers switched to hedge funds due to insufficient incentive mechanisms, resulting in a weakening of the investment and research capabilities of mutual funds, which further dragged down the product returns. Passive funds, on the other hand, attracted a large amount of capital inflows due to their advantages of low fees, high position transparency, relatively stable returns, and high certainty, thus reshaping the industry landscape.

Specific data shows that from 2010 to 2019, US passive funds had a net inflow of 2.5 trillion US dollars, while actively managed funds had a net outflow of 2.6 trillion US dollars. Meanwhile, hedge funds became the main producers of alpha returns with their flexible investment strategies and incentive mechanisms, which is very similar to the current changes in the domestic public - offering fund market.

It is worth noting that the domestic private - equity fund market is indeed experiencing positive developments as the main destination for public - offering fund managers after their departure.

In the past, in the public - offering fund industry, a prestigious university background was a prerequisite for becoming a fund manager. The backgrounds of private - equity fund practitioners are relatively diverse, and there are many so - called "maverick" players whose success experiences lack stability, logic, and replicability. In Fang Yi's view, in the future, more public - offering fund managers from large platforms and academic backgrounds will enter the private - equity fund industry, which is expected to make the industry more segmented and scientific.

Therefore, private - equity funds focusing on alpha returns while the beta attribute of public - offering funds becomes more prominent may be the long - tail effect of this fee reform.

(At the request of the interviewee, Fang Yi in this article is a pseudonym)

*Disclaimer:

The content of this article only represents the author's views.

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