The financial landscape of China is currently witnessing a significant examination of the challenges faced by small and medium-sized public investment fundsThe stereotype often associated with these entities is underlined by the so-called "Matthew Effect," where the rich get richer, leaving smaller players struggling to stay afloatHowever, a closer analysis of the data indicates that this notion may not universally hold true, as varying individual capabilities play a crucial role in navigating market opportunities, in stark contrast to the perception of a homogenized crisis.
The recent decision by China Foreign Economic and Trade Trust Co., referred to as "Foreign Trade Trust," to list its 25% stake in Baoying Fund at the Beijing Property Exchange has brought renewed scrutiny on the viability of smaller public funds
This move comes in the wake of announcements surrounding the departure of five senior executives from Jiangxin Fund and persistent rumors about unpaid salaries at a certain small-scale fund, contributing to a climate of apprehension within the industry.
Critics have attributed these occurrences to the "Matthew Effect," positing that challenges faced by smaller public funds are indicative of an unavoidable trendConversely, a rigorous examination of the data appears to contradict this narrativeFor instance, data from Dongfang Caifang CHOICE reveals that as of the end of the first quarter, the top ten fund companies collectively managed assets amounting to approximately 11.39 trillion yuan, which represents around 39.63% of the total public fund size of 28.74 trillion yuanInterestingly, this figure has decreased by 3.28 percentage points since the end of 2019 and dropped by 9.37 percentage points since the end of 2015, suggesting a relative contraction in market dominance by larger entities.
Yet, the growing disparity among market participants remains evident
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Taking a closer look at Baoying Fund and Wanjia Fund serves as a focal point; at the end of 2015, their public fund sizes ranked 28th and 55th respectivelyFast forward to the end of the first quarter of 2024, and Baoying has plummeted to 66th while Wanjia has risen to 25thThis rise and fall can be attributed to differing degrees of market opportunity recognition during pivotal periodsFor instance, between 2016 and 2018, during a general adjustment period in the A-share market, total public fund sizes soared from 8.40 trillion yuan to 13.03 trillion yuan, a staggering 55.12% increaseHowever, while Wanjia Fund capitalized on this growth, more than doubling its public size, Baoying Fund saw a grim reduction of over 60%.
The recent listing of Baoying Fund's stake has stirred commentary suggesting that this reflects a strategic shift within the trust industry towards "optimizing asset structures" and "focusing on core responsibilities." However, it is essential to note that among the 21 funds classified as "trust system" funds, instances of stake relinquishment by trust companies remain a minority, and should not be viewed as an overarching trend.
Further details surrounding the listing reveal that as of the close of 2023, Baoying Fund had a total asset management scale of 137.82 billion yuan, of which 67.33 billion yuan was managed through public funds
Despite its public appeal, the primary financial metrics of Baoying Fund remain undisclosed, raising questions about its operational transparencyIt was established in 2001, with a registered capital of 100 million yuan, holding a 25% ownership structure by Foreign Trade Trust and a 75% stake held by China Railway TrustInterestingly, China Railway Trust itself is 78.91% owned by China Railway Group, yet the parent organization has been notably silent on Baoying’s financial reports.
Interestingly, Foreign Trade Trust reported a net profit of approximately 810.7 million yuan for the year 2023, a figure demonstrating a healthy growth trajectoryAs of year-end, its net asset value stood at approximately 19.11 billion yuan; however, a marked decline was seen in the commission-based income, a key area of revenueThis decline has been attributed primarily to trust assets, showcasing the complexities in the relationship between trust companies and their public fund subsidiaries.
Despite the seemingly positive financial indicators, Baoying Fund has experienced a noticeable underperformance regarding industry standards over recent years
By the end of the first quarter of 2024, its public fund scale stood at 71.66 billion yuan, reflecting a 6.43% rise since the start of the year, yet a decline of 9.67% compared to 2015 figuresHistorical data indicates that missing out on market potentials from 2016 to 2018 is a critical reason behind Baoying's struggle to keep pace with average industry growth.
The A-share market underwent a rapid expansion during this period, encouraging many retail investors to engage with public fundsTotal public fund size rose from 8.40 trillion yuan at the end of 2015 to 13.03 trillion yuan by 2018, marking a 55.12% increaseYet, throughout this tumultuous growth, Baoying’s public management scale plummeted from 79.33 billion yuan to 26.83 billion yuan, representing a steep decline of 66.18%. Consequently, its ranking fell from 28th to 65th.
While between 2019 and 2023, Baoying Fund began to exhibit signs of recovery, its previous failures to leverage earlier opportunities meant its standing remained unimproved in comparison to competitors experiencing similarly robust growth
While Baoying’s public fund size grew by 151% since the end of 2018, its ranking plummeted to 70th by the end of 2023. This contrasts sharply with Wanjia Fund, which saw its public fund size escalate to 393.81 billion yuan, marking a phenomenal increase of 366% during the same period, propelling its rank to the 23rd position.
Examining product structure offers further clarity regarding Baoying’s stagnation, particularly in the equity products segmentIn 2015, the equity funds' size reached 49 billion yuan, only to plummet to 12.43 billion yuan by the end of 2018, a staggering 74.64% lossAlthough by the end of 2023, this segment had recovered to 19.40 billion yuan, it still represents a 60.42% decline from its 2015 valueNotably, the share of equity funds in Baoying’s total public fund portfolio shrank from 61.79% to 46.35% between 2015 and 2018 and further slipped to 28.82% by 2023.
Moreover, a peculiar recurring theme across the trust sector is the frequent transfer of stakes, as evidenced by the recent staking change at Baoying Fund
For instance, on May 13, Aviation Trust similarly listed its stake in Jiahua Fund on the Beijing Property Exchange, albeit with less detailed disclosure regarding Jiahua's asset management scaleAll these signals indicate an underlying strategy to streamline operations.
Amidst this volatility, other public trusts are also experiencing a shake-upRumors surrounding Shanxi Trust's potential transfer of its stake in HSBC Jin Trust reflects an ongoing trend of turbulence in the sector, as seen by the multiple funds applying for the "change of over 5% corporate shareholding or actual controller" statusThese adjustments predominantly involve small to medium-sized firms grappling with industry pressuresThe recent exodus of managerial talent from Jiangxin Fund has further fueled speculation of a heightened strain on this segment, thereby prompting discussions surrounding the prevalent "Matthew Effect."
However, discussions surrounding the "Matthew Effect" require scrutiny
As mentioned previously, Dongfang Caifang’s analytical framework underscores the shrinking dominance of top-tier funds in the public investment arenaAs of the first quarter of 2024, the largest ten fund companies together commanded 11.39 trillion yuan, which continues to decline compared to earlier yearsThis discrepancy signals that the phenomenon of larger funds monopolizing the market may not be as pervasive as assumed, yet the individual disparities in recognizing market opportunities remain vital.
The recently published findings contribute to a broader narrative where the future for small and medium public investment funds is complicated, yet far from hopelessAs market dynamics continue to evolve, the emphasis on strategic recognition of opportunities may yield a redress for smaller players amid pressures exerted by their larger counterparts.