Summary of Key Points
Recently, the fund industry has been undergoing a reform to “calibrate performance benchmarks”: Fund companies have started adjusting the “performance comparison benchmarks” (which can be understood as the reference points or minimum standards for evaluating fund performance) of their existing funds. The first batch of 195 funds (involving 12 companies such as E Fund and Huaxia, with a total scale of nearly 400 billion yuan) took effect on June 1st, followed by additional adjustments in mid-June, mid-August, and mid-October. This adjustment is not about changing the fund’s portfolio; rather, it aims to address an longstanding issue in the industry: the mismatch between the original benchmarks and the actual investments held by the funds, which led to discrepancies between the returns shown to investors and the “minimum standards” (for example, some funds that made a profit did not outperform the old benchmark, while others that lost money performed better than the benchmark). Regulators are pushing this process in a phased manner to avoid disrupting the market. Additionally, specific rules for industry-themed funds (such as those focused on semiconductors or healthcare) are also being developed.
Why Change the “Performance Benchmarks”?
When you invest in funds, do you check whether they have outperformed their “performance comparison benchmarks”? These benchmarks were designed to measure the performance of fund managers. However, in the past, many funds’ benchmarks did not reflect their actual investment portfolios:
- Example 1: The景顺长城 Global Semiconductor Chips Fund earned a 107.5% return over the past three years (which seems good), but since the old benchmark increased by 111.43%, it actually did not meet the standard.
- Example 2: The Tianhong Cloud Life Preferred Fund lost 10.23% over three years (which seems poor), but since the old benchmark decreased by 17.62%, it actually outperformed by 7 percentage points.
Nearly one-third of funds exhibited this discrepancy between their performance and the benchmarks, indicating that the benchmarks were not serving as a reliable reference. The purpose of these adjustments is to make the benchmarks more in line with what the funds actually invest in. For example, funds invested in the healthcare sector will have their benchmarks adjusted to reflect health industry indices, and those with a heavy allocation to Hong Kong stocks will see increased weights for the Hong Kong stock index.
What Were the Changes Made in the First Batch of Funds?
The direction of the adjustments for the first 195 funds was clear: to align the benchmarks with the actual investments:
1. Switching to more appropriate broad-based indices: Forty funds replaced the CSI 300 (which covers 300 large companies) with the CSI 800 (which covers 800 companies, providing a broader representation), such as Huashang Advantage Industry and E Fund Innovation-driven.
2. Matching industry-themed funds with relevant industry indices: The E Fund Large Health Theme Fund changed its benchmark from the CSI 800 to the CSI Health Industry Index (which only includes health-related stocks), and the Southern Finance Theme Fund changed its benchmark from the CSI 300 to the CSI All-Index Financial Index.
3. Adjusting the weight of Hong Kong stocks: The Ruiyuan Balanced Value Three-Year Fund originally had a 20% weight for Hong Kong stocks in its benchmark, but its actual portfolio contained 38.41% Hong Kong stocks; therefore, the benchmark was adjusted to 35% to better reflect the actual situation.
These adjustments make the “minimum standards” for fund performance more reasonable, allowing investors to more accurately assess the performance of fund managers.
The Schedule for Subsequent Adjustments
The reform will not be completed all at once but will proceed in phases:
- Second batch: Announcements will be made in mid-June. At this point, fund companies are either waiting for regulatory feedback or confirmation from custodian banks (for example, a company stated, “The plan is basically finalized; we are awaiting the custodian bank’s approval letter”).
- Third and fourth batches: Announcements will be made in mid-August and mid-October, with each batch taking effect about one month after the announcement.
- Phased implementation rules: If a company needs to adjust more than 100 funds, it will do so in 3–4 batches; if fewer than 20 funds need adjustment, it will be completed in one go, covering various types of funds (equity, bond, FOFs, etc.).
Regulators have emphasized that benchmark adjustments cannot be made arbitrarily. If a change in the portfolio is necessary, a plan must be established to avoid large-scale stock transactions that could disrupt the market (funds with a scale of over 5 billion yuan must provide additional details about the adjustment arrangements).
The Fine Details of the Adjustment Process
Fund companies do not make these adjustments arbitrarily; they have to go through a thorough process:
1. Initial review: Since the policy was implemented in January, companies have been checking whether their funds’ portfolios match their benchmarks.
2. Finding suitable benchmarks: If the current benchmark is inappropriate, they must select an appropriate index from the regulatory “benchmark library” (such as an industry index); if no suitable index is available, a special application and justification are required.
3. Regulatory and custodian review: The proposed adjustments must be reviewed by regulators (e.g., to ensure they do not lower the standards or deviate from historical performance) and custodian banks (to confirm there are no issues).
4. Heavy workload: Some companies have mentioned that the process is quite extensive, and progress may be slower in subsequent batches due to the need to consider various factors such as the actual investment strategies of fund managers, contractual agreements, and historical portfolio compositions.
What Is the Impact on Investors?
There’s no need to panic—these adjustments are not about changing the funds’ portfolios! The main goal is to improve the accuracy of the performance evaluation criteria. For investors:
1. clearer performance assessment: The benchmarks will now more accurately reflect the actual performance of fund managers, making it easier to evaluate their capabilities.
2. No need for unnecessary actions: Changes in benchmarks do not mean that the funds’ portfolios will be changed, so there’s no need to redeem or add investments based on these adjustments.
3. More precise benchmarks for theme funds: As specific rules for industry-themed funds (such as semiconductors and healthcare) are developed, their benchmarks will better reflect the high volatility and concentrated investment patterns of these funds, allowing investors to make more informed judgments about their performance.
In summary, this reform aims to make the evaluation criteria for funds more fair. For investors, it means that the reference points for choosing and evaluating fund performance will be more accurate in the future.