The close of the year 2024 marks a significant milestone, as it encapsulates the twenty-sixth year of the public mutual funds industry in ChinaThroughout the year, the sector has endured a tumultuous landscape characterized by plummeting performance metrics, a deafening silence in new fund issuances, and a decline in market reputation that persisted until the third quarterHowever, a resurgence in equity markets post-September 24 heralded a shiftAs the market began to stabilize, an overall improvement in performance was noted, with two-thirds of actively managed equity products successfully achieving positive annual returnsFurthermore, the new issuance market began to show signs of recovery, with fundraising numbers exceeding 147 billion yuan for two consecutive months.

Reflecting on the year, the mutual fund industry experienced pivotal transformations that will likely shape its future trajectory

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The total assets under management rose continuously, surpassing several significant thresholds, ultimately peaking at 32 trillion yuanConcurrently, initiatives aimed at reforming fee structures saw comprehensive rates slowly trending downwardAlso noteworthy was the emergence of passive investment strategies, which began to rival traditional actively managed equity products in prominenceStringent regulatory measures and various guiding regulations played a crucial role in prompting the industry to refocus on its foundational principles, placing investor satisfaction at the center of operationsAdditionally, market forces expedited the cleansing of underperforming equity products and instigated an ongoing reshuffling within the cadre of fund managers.

As the new market cycle unfolds, looking ahead to 2025, opportunities and challenges for the public mutual funds industry continue to loom large

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Industry insiders opine that the robust demand for asset allocation among investors and their improving understanding of financial markets will catalyze expansive growth within index investingHowever, the surge of passive strategies is not perceived as an unending trend; active equity products remain the bedrock upon which the mutual fund industry is builtAs discussions of “active versus passive” investing gain momentum, the ramifications of these shifts could redefine investment strategies moving forward.

This sentiment is echoed by Su Junjie, General Manager of the Index and Quantitative Investment Division at Penghua Fund, who remarked on how the rise of index-based investing has established itself as an irreversible trend and a central pricing influencer in the evolving market landscapeWith active management's excess return potential being increasingly squeezed, capital allocation returns have become a primary contributor to portfolio performance

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This landscape is indicative of a broader shift in the A-share market dynamics, transitioning from a focus on "alpha" to a renewed emphasis on "beta."

The expansion of public mutual funds continues unabated, with data from the Asset Management Association of China (AMAC) indicating that by the end of November, the net asset value of public mutual funds hit approximately 31.99 trillion yuan, reflecting an increase of 4.39 billion yuan from the previous yearWhile this growth is a stark contrast to the leaps of over 5 trillion yuan witnessed in the booming years of 2020 and 2021, it signifies a relative recovery from the downturns experienced in 2022 and 2023. Moreover, stock funds are emerging as formidable contenders within this expanding pool.

The growth in stock fund assets amounted to 1.6 trillion yuan during 2024, bringing the total to an unprecedented 4.44 trillion yuan

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Nevertheless, the size of mixed funds, primarily consisting of active equity, continued its three-year contraction trend, concluding November at 3.51 trillion yuan, representing a staggering reduction of 439.6 billion yuan since last year and a 40% drop from the peak levels seen at the end of 2021.

As the industry grapples with these fluctuations, a noticeable shift in investor sentiment has occurredMany are migrating from the active equity space to alternatives, with aspirations of achieving market-average returns rather than outpacing the market itselfMany investors opted to retract their positions after a prolonged period of losses, which was preceded by a near three-year drought for active equity products that resulted in significant capital lossesBy the end of June, a notable index of equity funds experienced a streak of six consecutive negative half-year performances, prompting some investors to cut their losses and exit their positions.

The rebound that followed the market’s powerful resurgence saw many public funds reclaiming their former net values

Yet amidst this recovery, a significant number of previously beleaguered investors chose to cash out rather than reinvestInterviews conducted with various investors and discussions in fund forums highlighted a mix of sentiments during this rebound; some regarded transitioning from major losses to minor ones as a stroke of luck, while others, after recouping losses or achieving minor gains, swiftly pulled their investmentsConversely, some investors pressed forward, optimistic about sustained market growth.

Insights from fund companies suggest that levels of net asset value around 0.8 yuan and 1.05 yuan represent critical junctures for redemptionsInstitutional representatives noted the notable uptick in investor exit strategies post-recovery, with some opting to secure their assets rather than risk further losses.

Quarterly reports further corroborate these observations, indicating a staggering net redemption of 291.2 billion shares in actively managed equity products during the first three quarters of the year—a 16.55% increase year-on-year, surpassing even the total net redemptions recorded in 2022. More than 80% of active equity funds saw their sizes contract in the third quarter, with net outflows totaling 93.3 billion shares, reflecting an over 110 billion rise compared to the previous quarter

The latest statistics from the AMAC reveal the relentless decline of mixed equity fund share sizes, shedding 168.1 billion shares since the end of the third quarter.

In stark contrast, passive investments are experiencing explosive growth across various metrics—including scale, new issuances, and funds flowing into the marketCompetition among fund companies is intensifying, particularly in terms of fees, launches, marketing strategies, and overall positioningData from Wind indicates that by the end of 2024, new stock fund issuances, bolstered by index funds, constituted 21.13% of the market, achieving the highest issuance level in nearly nine years, whilst mixed fund launches dropped to a mere 5.91%, marking a new low over the past twelve years.

Moreover, stock-based ETFs continue to attract investments significantly; since late September, inflows into the ETF market have surged, with over 1 trillion yuan flowing in throughout the year

Major firms, such as Southern Fund and Harvest Fund, collectively slashed management fees for broad-based ETFs and associated products to the lowest in the industry, thereby attracting more long-term capital into the market.

The dynamics of the mutual fund landscape are continually shifting, with index products—especially ETFs—entering a remarkable growth phaseAccording to Wind data, by the close of the third quarter, the total equity market size was approximately 7.14 trillion yuan, with index-based products comprising 3.36 trillion yuan, nearly half of the entire equity fund landscapeThe gap between actively managed and passive funds is closing rapidly, reducing to 416.3 billion yuan as opposed to 1.94 trillion yuan at the previous year’s close.

The acceleration in ETF growth is strikingFrom the inception of the first domestic ETF in 2004 to the initial crossing of the trillion-yuan threshold in 2020 took 17 years; the subsequent threshold was breached within just three years, and the latest milestone of 3.74 trillion yuan was achieved in less than nine months.

Looking ahead, many believe that the augmented growth in index investing stems from a combination of institutional investments, increased recognition of A-shares’ value, and an overall market faith in diverse investment tools

Moreover, the recent “nine national policies” further underline the importance of fostering public equity funds, expediting the approval of ETFs, and advancing index investing initiatives.

Nonetheless, the palpable shift towards passive strategies does not mean that active funds are facing an inevitable demiseAnalysts maintain that the pressures facing actively managed funds should not negate their potential for generating above-average returns in the medium to long termThey emphasize that the challenges facing the A-share market are complex and multidimensional, illustrating that discussions surrounding the relative viability of active versus passive strategies need a nuanced understanding of market dynamics.

As the conversations around investment methods evolve, the path ahead encompasses both opportunities and formidable challengesA not-so-distant past was characterized by a belief that success in A-shares through active investing was not only feasible but practically straightforward

This perspective has undergone a significant reversal as of 2024. Observers note that the fervor surrounding index investing signals a firm move towards the "tool-ification" of public funds, but the essence of active management remains a critical underpinning of the industry.

The growth of passive investment strategies undeniably reshapes the fabric of investment cultureWith increasing scrutiny on the performance and viability of actively managed funds, players within the space face scrutiny that mandates a realignment of expectations, methodologies, and, inevitably, their investment decisions.

Approaching 2025 with cautious optimism, market dynamics remain in fluxAs regulatory policies tighten and the market’s pace of evolution accelerates, fund managers are compelled to reassess established paradigms, embrace innovation, and remain responsive to shifting investor priorities