Don’t be too optimistic about stock funds

Recently, my colleagues and I conducted a survey on the preferences of ordinary investors. From the results, everyone seems to have very good expectations for stock returns in 2021—the average is 41%. This is really an exaggeration.

People are so optimistic, and I suspect that one of the important reasons is that many people have obtained excess returns in 2020, and they have obtained them through investment in public funds.

More than 67% of the respondents began to agree that giving money to public fund managers and letting them invest is a good way to make money. This effect is probably what the management wants.

Even some fund managers have become Internet celebrities. They look so ugly, but if they can make money for fund purchasers like in 2020, investors are even willing to spend their energy on P-charts for them and care about their growing hair loss problem.

The issuance trend of public funds in 2021 is also amazing. As of the Spring Festival holiday, the scale of newly issued public funds with stocks as the main investment product is close to 6,000 billion yuan. It is expected that another 3 trillion yuan will be issued in the rest of 2021. This is a bit reminiscent of the situation in early 2007.

The extreme optimism of individual investors is reflected in the stock market and there will be some incomprehensible phenomena, and it is the same in the field of funds.

In January this year, more than 200 billion yuan of funds were chasing a public fund-the planned issuance scale of this fund was only a few tens of billions, and applicants needed to draw lots to be eligible to buy this new fund. This behavior is really hard to understand.

First, why would fund investors accept this kind of humiliating waiting? If they really think that active investment funds are more profitable than passive investment, they can pick the one they like the most from thousands of active funds.

In fact, even for the new fund for which everyone needs to draw lots, its fund manager still manages other public offering funds and buys it casually, without queuing at all.

Even worse, is this crowded giant fund really a good product?

I remember that there was a Harvest Strategic Hybrid Fund, which set a record of 40 billion yuan in a single day for the scale of public funds on the day of its issuance. It was the end of 2006. By the way, if a person who invests in stocks has not experienced the stock market turmoil from 2006 to 2008, it is really a pity that he can write a story book about the anecdotes of the market at that time.

At that time, my wife was a freshman who had just left the university campus and used the first 10,000 yuan she saved to buy the Harvest Strategic Mixed Fund. Soon, that 10,000 yuan became 6,000 yuan. She very much hopes that her first investment can get back the principal, so this wonderful fund allows her to develop the habit of long-term investment.

Looking at it now, this Harvest fund has been in operation for 14 years, and the long-term investment annualized rate of return is about 10% (if all dividends are reinvested). This result is slightly inferior to the 12% average of competing products, but it’s still justified.

However, when making this comparison, people tend to overlook a variable, that is, the scale of the Harvest Strategic Hybrid Fund has changed from 40 billion yuan to the current 4 billion yuan.

The size of this fund stayed above 10 billion yuan for only one and a half years, that is, from the end of 2006 to the middle of 2008. At the stage when the scale is still huge, its investment yield is not only far lower than similar competitors, but also defeated miserably by the CSI 300 Index, which is the benchmark for comparison, by 50%.

Can you imagine that a fund managed by humans will lose 50% of its return to the reference index after one and a half years of issuance!

Such a difference in fund yield is of course related to the level of investment and operation of the fund manager team. In addition, excessive scale is indeed a constraint.

If a single active fund is too rich, it will face some problems. The fund manager manages too much money and is subject to the double ten constraint (that is, the single stock held cannot exceed 10% of the total fund, nor can he hold more than 10% of a single stock). At this time, he needs Holds more stocks than a general-sized fund.

As Buffett said, the stocks people invest in are best within their own circle of ability. If there are too many stocks to follow, investors will have misjudgment, which will affect the total investment income. The investment managers of super-scale active funds generally have relatively rich experience in the industry, but they cannot get rid of the limitation of human attention dimensions.

The super-crowded fund is logically so bad that investors have to buy it, just like betting on the fattest participant in the gamble on who will win a certain marathon.

Perhaps the most important feature of this type of product is that it allows fund companies to collect money more efficiently, but it is of no benefit to investors.

Just like in previous bull markets, fund companies admire outstanding fund managers very much. But fund companies probably can only do this. This is the only difference they can show. Passive investment index funds are second-tier products.

Indeed, the investment managers of active funds have performed well in the past two years, and their average returns have greatly exceeded the growth of the corresponding index. Moreover, statistics from many institutions show that the average return rate of long-term investment by fund managers of public funds is much better than the return rate of the index. But can these really predict how investors will invest in the future?

Not necessarily.

There is a fact here: in the long run, the performance of active stock investment funds is better than the corresponding index, but not as much as people think. The average difference in their returns is around 1%. This is due to the insufficient effectiveness of the Chinese stock market-which can be associated with a problem. In view of this lack of effectiveness, value investing is very suitable for the Chinese mainland market, where outstanding investors should be able to get better than average through optimization. Higher levels of arbitrage.

However, as the effectiveness of the Chinese market has increased, the income gap between fund managers and indexes has shown an overall narrowing trend.

The reason why people now admire active investment funds more, the most critical factor that influences their thinking is the performance of active investment funds from 2019 to 2020. However, it is likely that everyone has overlooked the role of contingency in investment. Occasionality is sometimes decisive for short-term investment returns. However, long-term returns are the most important to investors.

Active stock investment funds have never beaten the corresponding index for three consecutive years. Fund managers have done well in 2019 and 2020, and 2021 will be the critical “third year”.

In addition, contingency is also manifested in fund managers who have been very famous recently. For many investment stars, their long-term investment performance has been improved by their super performance in the past two years. If the recent outliers are eliminated, their previous long-term investment returns are not outstanding.

If you look at it yourself, the outstanding stocks have been relatively concentrated in the past two years. One is concentrated in certain industries, and the other is that the number of stock holdings is relatively concentrated. This method of investment magnifies the effect of contingency even more, that is, magnifies risk.

The KPI assessment method of fund managers determines that young people among them like to take risks with investors’ money, because if the risk is successful, they can get very rich rewards and industry status; if they are not successful, most of the losers will still stay In the investment circle, it’s just that they will become relatively ordinary fund managers, but the salary they get is still much higher than that of ordinary people.

There is a more important point that affects people’s choice, the issue of charges for active investment funds. Their annual fees are about 1.5% higher than the corresponding index funds. Remember what we said earlier, how much higher the average return of active investment funds is than the corresponding index? Less than 1%. This fee gap completely offsets the outstanding part of fund managers’ smart minds than doing nothing.

As for the investment income in 2021, I think most investors also need to have a more realistic understanding.

As we talked about in December 2020, the probability of stock investors getting better returns in 2021 is still quite large, but there should be a limit to this kind of “better”.

Buffett once calculated the long-term return of the US stock market, which is about 12% including inflation. The average return on the stock market from 1926 to 2005, calculated by Aberson, was around 10% after excluding inflation.

The long-term earnings in the Chinese market is very close to the data obtained by Aberson’s statistics, which is 11%, but it includes the inflation rate.

This is probably a more realistic idea, that is, if your stock returns exceed 10%, it is already a pretty good return. In the long run, people’s investment plans should also be measured by this level of return.