Article source: the finishing touch of CICC
Author: Wang Hao, Liu Junwei, Wang Hanfeng
How to implement the exponential enhancement strategy?
Index enhancement strategy refers to the return on investment that surpasses the index through active management on the basis of effective tracking of the benchmark index, so the return of index enhancement strategy is divided into two parts: beta return (Beta) and alpha return (Alpha).
Beta income comes from the passive tracking of the index. The benchmark index can be a broad-based index such as Shanghai and Shenzhen 300,500 and 1000, as well as industry, theme and other customized indexes. Alpha income comes from active management, which is obtained by stock selection in low frequency, intermediate frequency and high frequency dimensions, and the specific strategy can be divided into fundamental analysis and quantitative model.
In the investment process of using quantitative model to realize index enhancement strategy, factor model is widely used. With the promotion of academic research on asset pricing and the exploration of investment practice in the past half a century, investors' understanding of portfolio returns and risks is becoming more and more scientific, and the proportion of the so-called "scientific analysis" in portfolio management continues to increase. Factor investment has become an important way of investment in the asset management industry, and the research methods of factor analysis have been found in all aspects of investment management.
All-round comparison of domestic index enhancement products
At present, there are three main types of domestic financial products with index enhancement as investment strategy: public funds, private funds and over-the-counter products, except for different issuers, there are obvious differences among these three types of products in terms of sales channels, investor structure, liquidity, management fees, investment strategies, performance and so on.
The advantages of public offering products are low threshold, transparent position and good liquidity.The disadvantage is that the strategy is single and the excess return is relatively low, which is suitable for ordinary investors to invest for a long time.
The advantages of private equity products are diversified strategies, fast model iteration and high excess returns.The disadvantage lies in high performance commission, general liquidity and high investment threshold, which is suitable for high net worth customers to buy and hold for a long time.
The advantages of over-the-counter products are high stability, low rate and customization.The disadvantage is that some products have a short duration and are suitable for tactical configuration of medium and high net worth customers and institutions.
Performance commission is an important factor affecting the return of private equity products. We have measured the performance enhancement of the index with and without performance commission under different levels of excess return. We can see that the net value of the benchmark index CSI 500 has risen from 1 to 6.8 since 2005, while the products of CSI 500 with 10% excess return and no performance commission have risen to 33.5 under the compound interest effect, but after deducting 20% performance commission. It only rose to 19.2.Only after the excess income is raised to 15%, the cumulative income of products with performance commission and products with no performance commission + 10% will be basically the same.
In the era of large asset management, index enhancement products have a broad prospect.
In 2021, the performance of the broad-based index in the major A-share markets is mediocre, showing a wide range of shocks as a whole, but there are structural opportunities at the industry and individual stock levels, and the high trading activity also provides fertile ground for index enhancement strategies to obtain Alpha. Public placement, private placement and over-the-counter index enhancement funds have all reaped good returns so far this year to become the "tuyere" of the market. We believe that in the era of large asset management, index enhancement products are not only a hot spot pursued by the market in the short term, but also an important tool for investors to allocate long-term assets.
1) Beta investment has great potential for development in China:Since 2017, China's index investment has experienced five years of rapid development, and the proportion of stock index funds in the total size of public stocks continues to rise, but from the perspective of the proportion of shareholding market value, there is still a lot of room for development compared with overseas markets.
2) there is still room for Alpha mining in China:Globally, we can see that many factors can still bring Alpha returns, and the efficiency of A-share market is still not strong, so domestic Alpha is still not so scarce compared with overseas mature markets.
3) long-term allocation needs of individuals and institutions promote the development of index products:Chinese residents are entering the inflection point of accelerated asset allocation. With the gradual improvement of the average living standard of Chinese residents, the proportion of residents' allocation of financial assets is expected to further increase. For ordinary individual investors, high net worth customers and institutional investors, index enhancement products will be favored by risk diversification, large market capacity, relative transparency and other advantages.
Edit / yabo