Active ETFs are laying their cards on the table, are fund managers about to have their investment strategies copied?

The holdings of active fund managers may be subject to daily market scrutiny going forward.

On October 19, the first batch of 18 active ETFs were approved, with 9 each on the Shanghai and Shenzhen Stock Exchanges. On October 20, 18 fund companies successively disclosed documents including product prospectuses and fund share offering announcements, and all the first batch of products will launch fundraising on October 23.

Different from ordinary active equity funds, this batch of products will be required to disclose the Creation and Redemption Portfolio (PCF) before the market opens on each trading day after listing and operation. The list is prepared based on the real investment portfolio at the end of the previous trading day, with both redemption consideration and holdings disclosure functions, allowing the market to continuously track changes in the fund portfolio accordingly.

In the past, ordinary active equity funds disclosed their top ten heavyweight holdings on a quarterly basis, and all stock holdings in semi-annual and annual reports. What investors usually saw was the investment portfolio at the end of the previous reporting period, making it difficult to keep up with the fund manager's position adjustment in a timely manner during the reporting period. Active ETFs add daily PCF disclosure, significantly improving holdings transparency. For fund managers who rely on active stock selection to obtain excess returns, after the increase in holdings transparency, how to avoid exposing trading intentions in advance has become a problem to be considered in product operation.

CLS reporters noted that the prospectuses of the first batch of active ETFs have clearly indicated "potential front-running risk" and "risk of investment strategy being replicated". Especially when fund managers cannot complete position building or position reduction within a single trading day, the continuously disclosed portfolio information may provide clues for other market participants to judge their trading directions.

The investment strategies of the first batch of products also reflect consideration for these issues. The Shanghai Stock Exchange disclosed that the newly approved active ETFs this time mainly focus on low-turnover, highly diversified, relatively robust investment strategies, covering directions such as large-cap balanced, large-cap growth, and dividend value.

Position adjustment direction exposed in advance, fund managers fear being front-run

Daily disclosure of the Creation and Redemption Portfolio is an important difference between active ETFs and ordinary active equity funds.

According to the business guidelines issued by the Shanghai and Shenzhen Stock Exchanges on June 17, active ETFs are required to prepare and disclose the PCF daily based on their real investment portfolios. This list has both redemption consideration and holdings disclosure functions. After the fund manager adjusts the portfolio, relevant changes may be reflected in the list of the next trading day.

For fund managers with frequent position adjustments and large single-trade sizes, public disclosure of holdings may bring additional trading pressure.

The prospectuses of the first batch of products have clearly indicated this. Take Hua An Balanced Select Active ETF as an example, its prospectus points out that if position adjustment occurs due to the implementation of active stock selection strategies and other reasons, and it is difficult to complete the adjustment within one trading day, the direction of stock position adjustment may be exposed, and other investors may front-run the portfolio securities, which will in turn affect the fund's investment returns.

This risk mainly arises during the continuous position building or position reduction process. A public offering fund manager told CLS reporters that the daily disclosure of holdings by active ETFs puts higher requirements on fund managers' trading arrangements. For large-cap stocks with active trading, it is relatively easy to complete position adjustment in a single day, but large transactions of some stocks still need to be carried out in batches. If the fund buys the same stock for several consecutive trading days, external funds may judge its position increase direction through the changes in PCF holdings, thereby affecting the subsequent transaction price.

"Especially when the fund size is large, the trading direction may be perceived by the market in advance before the transaction is completed." The fund manager said that if other funds front-run the transaction, the cost of the fund's subsequent position building or position reduction may increase.

Once other funds buy in advance, the fund will face a higher transaction price for subsequent position building. During the position reduction process, if other investors sell in advance, it may also increase the fund's selling cost.

This type of impact may become more obvious after the fund size expands. For an active ETF with a scale of several billion yuan, if it adjusts the position of a certain stock by a relatively large proportion, the actual transaction amount may be relatively high. Even if the fund manager makes an accurate judgment on the individual stock, the transaction price is interfered by other funds, which may also affect the final return.

However, the PCF discloses the portfolio situation of the previous trading day, not real-time transaction records. External investors cannot directly see the fund manager's unexecuted trading instructions, nor can they easily judge their subsequent operations solely based on the change of holdings on a single day.

For fund managers who adopt long-term holding and low-turnover strategies, the relevant risks are relatively controllable; strategies that rely on short-term trading opportunities and frequently adjust individual stock positions may face higher transaction costs.

With holdings made public every day, will active strategies be replicated?

In addition to the exposure of trading direction, the replication of investment strategies also appears in the risk disclosure of the first batch of active ETFs.

The prospectuses of multiple products point out that since the fund announces the Creation and Redemption Portfolio prepared based on the real investment portfolio every trading day, other investors may track and replicate the fund's investment strategy and holding structure accordingly, thus weakening the effectiveness of the investment strategy.

For ordinary active equity funds, the holdings disclosed in regular reports already have a certain time lag. The multiple position adjustments completed by fund managers within the quarter are often difficult to restore through the quarterly report.

Active ETFs are different. With the continuous disclosure of PCF, market participants can observe the daily changes in their holding structure. For funds with relatively stable investment styles, through long-term data accumulation, their industry allocation preferences, individual stock selection and position adjustment rules can be further analyzed.

In particular, quantitative institutions can track changes in fund portfolios by combining data such as daily PCF, stock quotes and market trading volume. Some continuous buying and selling behaviors may be more easily identified than ordinary active funds.

However, the fact that the investment portfolio can be observed does not mean that the fund manager's investment returns can be fully replicated. A fund investment researcher told CLS reporters that PCF reflects the formed investment portfolio, and external investors can observe changes in holdings, but it is difficult to grasp the fund manager's subsequent trading arrangements. In addition, changes in fund size and share subscription and redemption will also affect the number of portfolio securities. It may not be possible to accurately restore the fund manager's actual operations solely based on changes in holdings.

The person believes that even if other investors follow to buy the same stocks, there may be large differences in final returns due to different trading time points, transaction prices and position adjustment rhythms.

Even if other investors buy the same stocks based on public holdings, there may be obvious return differences from the original fund due to different trading time points, transaction prices and position adjustment rhythms. In addition, the active management ability of fund managers is not only reflected in which stocks they select. The timing of individual stock trading, holding period and portfolio risk control also affect the investment results.

From the perspective of investment strategies, fundamental-driven investment methods with long stock holding cycles are relatively less sensitive to short-term holdings information exposure. Some strategies that rely on trading speed, short-term price changes and small-cap stocks may be more affected.

The increased frequency of holdings disclosure also makes it more convenient for investors to observe the actual investment style of the fund. Whether the fund manager deviates from the original investment strategy and whether they continue to allocate concentratedly in certain industries can be more timely reflected through the continuously disclosed information.

Why do the first batch of products prefer low-turnover and diversified holdings?

Judging from the product selection of the first 18 active ETFs, balance, value and dividend are the main layout directions.

CLS reporters sorted out according to product names and strategy positioning and found that among the first batch of products, there are 9 balanced products, 4 value products, 3 dividend products, 1 quality selection product and 1 large-cap growth product. The products include both fundamental active stock selection strategies, quantitative stock selection strategies, and strategies combining quantification and fundamentals. From the perspective of product strategy positioning, the first batch of active ETFs as a whole tend to adopt investment methods of diversified holdings and low turnover.

Relevant business rules also put constraints on product holdings. Taking the Shanghai Stock Exchange business guidelines as an example, the number of securities held in the active ETF investment portfolio shall not be less than 30, and the total weight of the top ten held securities shall not exceed 60% of the net asset value of the fund. At the same time, it requires the invested securities to have good liquidity, reasonably control the portfolio turnover rate, and avoid short-term frequent transactions and concentrated large-scale position adjustments.

For fund managers, diversified holdings can reduce the impact of a single stock transaction on the portfolio, and low turnover helps reduce the chance of continuous exposure of trading directions.

In addition, active ETFs need to take into account the primary market subscription and redemption and secondary market trading of fund shares. When the fund manager adjusts holdings during the trading day, the Indicative Optimized Portfolio Value (IOPV) calculated based on the previous PCF may deviate from the real-time fund net value.

The prospectuses of the first batch of products also indicate that the deviation between IOPV and the fund net value may widen during the position adjustment period, and the effectiveness of the arbitrage mechanism may decline, which in turn affects the premium and discount performance in the secondary market.

For ETF market makers, the liquidity of held securities, the frequency of portfolio adjustment and the accuracy of fund net value estimation will all affect daily quotations. For fund managers, in addition to stock selection, they also need to consider the impact of portfolio adjustment on fund subscription, redemption and on-exchange trading.

As products are issued one after another, whether fund managers can control transaction costs and continuously obtain excess returns under the condition of daily disclosure of holdings will be directly tested by the market.

This article is from the WeChat official account "CLS", author: WU Yuqi, authorized for release by 36Kr.