Mr. Li Haipeng, Deputy General Manager & Chief Investment Officer (Fixed Income) at Southern Asset Management, expects the bond index fund market to continue to grow in size and sophistication with the new business formats of the asset management industry. He says his company will further improve the index fund product line based on customer requirements, and provide customers with more diversified instruments.
Advantageous bond index funds onto a fast growth track
As early as in 2011, a bond index fund, namely China Southern CSI 50 Bond Index Fund, was made debut in China's fund industry. It is the predecessor of China Southern China Bond 10-year Treasury Bond Index Fund. However, it was not until 2018 that the bond index market stepped onto a fast growth track in the real sense. Over the past two years, there has been a growth of more than RMB300 billion in the market size. As of 1Q20, the entire market had 103 bond index funds putting RMB367,953 million under management and covering many different classes of assets, e.g. policy-related financial bonds, local government bonds and unsecured bonds with high credit ratings.
Mr. Li said, rapid development in the past years is an inevitability for China's bond index funds, and this is also an irresistible development trend of global mutual fund industry. According to the statistics of Bloomberg, as of 1Q20, bond index funds (including ETFs) in the U.S. had a size of about USD1.52 trillion, accounting for over 28% of all the fixed-income mutual funds. China's bond index funds share a series of common characteristics with their foreign counterparts but they are also unique in their own ways: First, with a clear risk & return characteristic, bond index funds are an ideal instrument for customers to realize the strategy of allocating assets among major categories and also the timing strategy. Second, the clear and transparent operations of bond index funds make them suitable for penetrated management of underlying assets, which is right in the direction of regulatory policies in the era of new asset management regulations. Third, the management fees of bond index funds are usually lower than traditional money market funds and active bond funds. Therefore, they are more cost-effective. Fourth, from a long-term point of view, the performance of passive products may beat active ones. Especially in the current low-interest rate environment, there are relatively limited opportunities of getting an alpha, i.e. excessive return, and thus passive products stand out with their particular advantages.
Mr. Li also stressed, China's bond index fund sector, in spite of a fast growth in recent years, is still in infancy compared with overseas, typically seen in: (1) a relatively small market size. In the entire market bond index funds account for about 8% of all the bond funds, a big gap from the 28% weight in the U.S.; (2)lack of product diversity. Bond index funds currently available in the market mostly invest in short- and medium-term policy-related financial bonds to reflect the common index performance. Their types and tenors call for innovation.
Promising bond index fund market to further enlarge volume
Mr. Li offered insights into the future development of bond index funds. He predicted the market volume and instrument nature of bond index funds would be further strengthened in the days to come. In the new era of pan-asset management, net worth-based product and penetrated supervision will define the development of financial industry. However, net worth-based product does not mean that customers can tolerate sharp fluctuations of product performance. In consideration of customers' traditional wealth management habit, the ability to create sustained absolute return will become the core competitiveness of mutual fund companies, wealth management subsidiaries of banks and other asset management institutions. Because of the big volatility of single assets and the difficulty for them to get an alpha, to secure a long-term stable return must rely on a portfolio which is made up of different assets and takes asset allocations among major categories as the core strategy.
Mr. Li analyzed, in the above-mentioned context, bond index funds which boast a low cost, clear risk & return characteristic, good liquidity, high transparency, stable return and risk decentralization will possibly become the next type of superb instrument products under the new business formats of the asset management industry in the future and help wealth management subsidiaries of banks and other asset management institutions to construct multi-asset portfolios in a cost-efficient manner. Thus, broad development prospects are expected for bond index funds.
Concerning what kind of competitive landscape China's bond index fund market will show in the future, Mr. Li said, "the development of bond index funds in the rest of the world obviously features 'leader effect' and 'first-mover advantage'. The bond index funds managed by Vanguard Group which has accumulated decades' experiences and been reputable in the industry approximate USD700 billion. iShares is a leader in the bond ETF sector, and bond ETFs managed by it exceed USD400 billion. In our opinion, the main reason lies in the fact that a larger fund decentralizes its liabilities and is thus more stable. This is conducive to the application of different asset strategies. What's more, purchases and redemptions by investors usually have a small impact on fund operations and help to control the tracking errors. Moreover, a larger ETF usually has higher liquidity and lower discount/premium in the secondary market, thus in a better position to meet the trading needs of investors, form a loop of positive feedbacks and continuously push up the size. A leader effect is expected in China's developing bond index fund market, just the same as the foreign markets, and the leading companies will become even stronger.
Southern Asset Management expanding bond index fund size to above RMB30 billion after years' endeavors
Back to 2011, Southern Asset Management began to tap the bond index sector, and issued China Southern CSI 50 Bond Index Fund, which was transformed into China Southern China Bond 10-year Treasury Bond Index Fund in 2016. After nearly a decade's endeavors, Southern Asset Management has become increasingly mature in the management techniques, system development and team building of bond index fund products. Its bond index funds post an annualized tracking error rate far lower than the average of comparable counterparts in the market during the operating period, and are more accurate in tracking indexes.
For many years, Southern Asset Management has made unremitting efforts to enhance the management capabilities of bond index funds and committed itself to building a China-famous bond index fund management brand. The long-term efforts have paid off. The company has accumulated rich experiences in the management of bond index funds and put in place an advanced management system. In addition, Southern Asset Management has continued to accelerate the deployment of index fund product line in a bid to provide institutional bond investors with a wide array of investment instruments. Since 2018, Southern Asset Management has taken faster moves in offering bond index fund products. By successively incepting and issuing index product series including China Southern China Bond 1-3 Years CDB Bond Index Fund, China Southern China Bond 3-5 Years ADBC Bond Index Fund and China Southern China Bond 7-10 Years CDB Bond Index Fund, the company has fully covered the yield curves of short-, medium- and long-term products. It has also successively issued a regional unsecured bond index fund, further enriching the product mix.
The years' endeavors of Southern Asset Management have been well recognized by customers. According to Wind and the 1Q product reports, as of 1Q20, bond index funds managed by Southern Asset Management added up to more than RMB30 billion, ranking ahead in the entire market; China Southern China Bond 1-3 Years CDB Bond Index Fund has become one of the largest bond index funds across the whole market with a size of over RMB28 billion.
Following the general trend of increasing investment in bond index products, Mr. Li introduced, "Southern Asset Management will remain focused on two aspects in the future. At the product level, we will, based on customer needs, further improve the index fund product line and provide customers with more diverse instrument products. On the basis of having extended our interest rate bond products to all yield curves, we will place a high premium on index enhanced products, unsecured bond index products and innovative ETF products to further diversify our product line. Particularly in terms of innovative products, Southern Asset Management will deem the development of inter-market ETFs and inter-bank market convertible bond index funds a key project in line with the policy orientation, and make efforts to become one of the first group of fund companies to pilot and premiere innovative products."
Company Overview
On March 6th, 1998, China Southern Asset Management Co., Ltd. (Southern Asset Management) was officially established as one of the first domestic asset management companies approved and regulated by the China Securities Regulatory Commission (CSRC), which symbolizes the start of our nation's "New Golden Era for Funds".
Southern Asset Management has stood the tests of time and sweeping change in the Chinese capital markets. By showing stable and sustainable performance and providing improved and professional services, Southern Asset Management has managed to continuously build trust and recognition through a wide range of investors including mutual fund investors, the National Council for Social Security Fund, corporate annuity clients and high-net-worth clients.
Southern Asset Management has grown to become an industry leader, with a diverse range of products, comprehensive business activities, exceptional investment performance and a large scale of assets under management. As of March 31st, 2020, Southern Asset Management and its subsidiaries had combined assets under management (AUM) of USD 160.8 billion. Visit www.southernfund.com.
Media Contact: Si Chen
E: chensi@southernfund.com
China Southern Asset Management
URL: https://southernfund.com
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