Industrial: Market fluctuations intensify. How are various types of funds moving?

Industrial released a research report stating that, overall, although there was some differentiation in the funding market in March, it did not create a negative cycle or show a trend of outflow. Instead, the relative abundance of liquidity may be one of the reasons for the relative resilience of A-shares in the global market. Moreover, the characteristics of this round of resonance of funds entering the market are obvious, and the impact of the phased outflow of single funds on the overall market is limited. With the gradual weakening of mid-term external geopolitical disturbances, the market is returning to seeking certainty in company fundamentals and industry prosperity, and fund inflows will support market recovery. The main points of Industrial are as follows: Since March, the index has experienced increased volatility, with the market turnover continuing to decrease, and concerns have arisen about the tightening of micro liquidity, the reduction of absolute return funds, and the formation of negative feedback. Since March, the global capital markets have been influenced by the US-Iran conflict, causing the A-share market to experience its largest adjustment since the introduction of tariffs last year. At the same time, the bankruptcy of the US and Iran, the tug-of-war between Trumps maximum pressure and Irans resilience in the Middle East, have led to a noticeable increase in volatility in the A-share market. Since last year, funds with absolute return properties have been important participants in the market's rise. In the background of increased market volatility and YTD turning negative, the market is worried that the reduction in absolute return funds' positions will lead to negative feedback. In fact, there has been no observed negative feedback in the A-share market. Some absolute return funds may have slightly reduced their positions in the previous period, but their willingness to increase positions after adjustment is stronger. Moreover, since this round of market rise, various funds, such as insurance funds, ETFs, private equity funds, margin trading, fixed income, etc., have resonated in the market entry. With diversified incremental funds combined with the expectation of national team support, the resilience of the funding side is stronger. This is also one of the important supports that make A-shares relatively more advantageous than other global markets since March. I. Absolute return funds may have outflows, but the willingness to increase positions after adjustment is stronger. Bond+, annuities, and insurance funds all belong to the category of absolute return funds, with equity composition mainly around 15%. In the face of increased market volatility and the pressure of turning negative returns within the year, some funds may have slightly reduced their positions to preserve returns. Although insurance funds and annuities have characteristics of absolute return, they also have stable funding sources and long payment cycles. Under the policy of promoting long-term funds to enter the market actively, the constraints and reductions in order to reduce volatility or reduce positions are not a policy encouragement. It is worth noting that the increase in the operating funds of insurance companies and annuities continues to be high, and there is a strong demand for equity asset allocation in their portfolios. They prefer to increase positions or build warehouses when opportunities present themselves. According to the survey results of fund managers, research directors, and chief researchers from more than 260 local core investment institutions from March 23 to 25, it is believed that for the coming month, there is consensus among relative return investors (54%) and absolute return investors (43%) that "maintaining positions unchanged but needing to adjust the structure." However, compared to relative return investors, absolute return investors have a stronger willingness to "increase positions" (21%) than relative return investors (12%). Absolute return investors' willingness to "increase positions" (21%) is also stronger than their willingness to "reduce positions" (16%). (I) Due to the characteristics of value markdown, the bond+ products have experienced significant fluctuations in their liability side. Since the third quarter of last year, the bond+ products have grown rapidly driven by the profit-making effect of the equity market. The profit-making effect of the equity market has led to passive growth in scale on one hand, and has also attracted institutional funds with absolute return characteristics and private individual funds with low-risk preferences to increase their participation. The net inflow of bond+ funds in 2025 Q3 & Q4 amounted to approximately 440 billion yuan and 200 billion yuan respectively. Compared to other absolute return funds, the bond+ products have experienced significant fluctuations in their liability side. In the past half-year, the equity share of the bond+ products has reached its historical high. Coupled with the roller-coaster market situation in the first quarter of the year, it is highly probable that the bond+ products will have a negative rate of return for funds that increased their positions within the year, which could lead to increased redemption pressure in the latter half of March for the bond+ products. (II) Corporate pensions have significantly increased their equity allocation over the past year due to external pressures and the need to reduce portfolio volatility. Since September 24, under the dual drive of increasing equity allocation at the core of corporate/occupational pensions and adding operating funds, corporate and occupational pensions have been increasing their allocation to equity assets. By the end of 2024, the total size of corporate and occupational pensions had reached 6.8 trillion yuan. Considering an annual increase of approximately 700 billion yuan in operating funds for corporate and occupational pensions, as well as the growth in assets due to appreciation, it is estimated that the size of pensions by the end of 2025 would be around 7.8 trillion yuan. According to revenue estimates for equity-type products and fixed-income products in corporate pensions, the proportion of equity assets in equity-type products has risen from around 8% in 2024 to about 15%. (III) Insurance capital has not significantly reduced positions, and there has been a significant rebound in heavily invested areas since March. Insurance capital has seen significant excess returns in heavily invested stocks since March, so it is unlikely that insurance companies have significantly reduced their positions either from a trading perspective or in terms of their intentions. At the beginning of the year, there were significant structural features in the market, whereby heavily invested dividend stocks favored by insurance companies had a significant decline in January, but since March, the excess returns of heavily invested insurance capital have rebounded. This suggests that insurance companies have not significantly reduced or dampened their positions in the face of the US-Iran conflict and have not shown a clear intention to reduce positions. As of the second quarter of 25, the five largest listed insurance companies held more than 60% of the total equity holdings in the industry. Therefore, even if some small and medium-sized insurance companies have been required to reduce their equity asset allocation due to their comprehensive solvency ratio touching the red line, the affected equity scale is relatively small. The comprehensive solvency ratios of the top insurance companies are all above 150%, which means that their equity investment limit is 30%. Even if their solvency ratios fall to the range of 100-150%, the equity investment limit of 20% is significantly higher than the equity position ratio of the top insurance companies. II. Broad-based ETF trading remains stable, with the China Investment Corporation (CIC) not yet stepping in to stabilize the market. Based on tracking data, the CIC has not yet intervened to stabilize the market towards the end of March. According to the daily net inflow data of the 15 key ETFs held by the CIC, there has been no significant net inflow of national team funds since the market adjustment began in this round. In addition, when the CIC significantly subscribes or redeems ETFs, the trading volume of the 15 key ETFs often accounts for more than 3% of the entire A-share market. In this round, broad-based ETF trading has remained stable and has not surged. When might the CIC step in to stabilize the market? Based on the CIC's previous operations to stabilize the market by subscribing to ETFs, they mostly occur when the market is experiencing rapid and significant decline, or when systemic risks increase. The probability of the CIC intervening to stabilize the market increases significantly when the index reaches the market's bottom area that is beyond the psychological expectations of most investors. According to the survey results of local core investment institutions, most institutional investors believe that the bottom position of the Shanghai Composite Index is near 3700-3800 points, with 36% believing it is around 3800 points and 43% believing it is around 3700 points. If the market significantly falls below 3700 points, the national team's willingness to protect the market may be stronger. III. Margin trading leverage funds remain stable. Since March, the margin financing and securities lending balance has remained relatively stable, with the average collateral ratio at a healthy level of moderate to high, indicating that the tail risk of leveraged funds is relatively low. As of March 31, the margin financing balance had dropped slightly by 60 billion yuan, and the average collateral ratio remained at a healthy level of 274%. The stable operation of leveraged funds has benefited to some extent from the foresight adjustment of regulatory rules at the beginning of the year. On January 14, the Shanghai and Shenzhen Stock Exchanges issued a notice adjusting the margin ratio for margin trading, raising the minimum collateral ratio for investors when buying securities on margin from 80% to 100%. This adjustment has temporarily curbed the trend of accelerated inflow of leveraged funds at the beginning of the year, and the adjustment only applies to new margin trading contracts, and has no impact on the minimum collateral ratio for existing contracts. IV. Private equity funds may have slightly reduced holdings in March. There is a high correlation between the outperformance of small caps and the trend of private equity fund inflows, and considering the first-quarter outperformance of small-cap styles followed by a decline, private equity funds may have slightly reduced their holdings in the latter half of March. The scale of newly registered private equity products in 2025 is nearly 500 billion yuan, and based on estimates of the management scale of private equity funds, there was a net inflow of about 1 trillion yuan last year, with quant funds being the main contributors to growth. The downward trend of quant funds in the small-cap factor over the past year has driven a higher correlation between the outperformance of the small-cap factor and net inflows of private equity funds. Since the beginning of the year, there has been a significant outperformance in the small-cap style, and the decline in small-cap styles in the latter half of March may indicate that private equity funds may have slightly reduced their holdings. V. Active equity fund offerings remain hot, while foreign funds have turned into minor outflows. Fund offerings in March remain at high levels, with new funds focused on balanced allocations and technology growth styles. On a base improved in the second half of last year, the issuance of active equity funds has become even warmer, especially with the later Spring Festival holidays and the catalyzing effect of the early year rally, the new issuance scale of funds established within 20 days prior to the Spring Festival had increased to over 70 billion. The new fund offerings continued to be robust after the Spring Festival, with a total issuance scale of 36.4 billion in March, with a focus on balanced allocations and technology growth styles. Since mid-March, both active and passive foreign funds have seen some outflows, but passive foreign funds turned into minor inflows in the last week of March. From late January to early March, active foreign funds recorded rare net inflows in their trend, but starting from the middle of March, they have seen three consecutive weeks of net outflows, particularly with the intensification of the US-Iran conflict. At the same time, passive foreign funds have also turned into outflows for two consecutive weeks, but in the last week of March, they reversed back to net inflows. Risk warning: Model calculation errors, policy lower than expected, equity market volatility, etc.