In the first quarter, public funds significantly increased their holdings in Hong Kong stocks. There are concerns among investors under the new regulations that some funds may need to rebalance their Hong Kong stock positions due to over-allocation.
On May 7th, China Securities Regulatory Commission released the "Action Plan for Promoting the High-Quality Development of Public Funds," proposing 25 reform measures. Among them, the regulations that have a significant impact on the market are:
1. Promote the reform of the floating management fee rate. If the product's actual performance during the holding period meets the same period's performance benchmark, the benchmark fee rate will apply; if it is significantly lower than the benchmark, a lower fee rate will apply; if it significantly exceeds the benchmark, a higher fee rate will apply.
2. Adjust the assessment mechanism for fund managers. On one hand, there will be a gradual emphasis on long-term assessments (with at least 80% of the performance weight coming from periods of more than three years); on the other hand, compensation will be directly linked to performance—if the fund's performance over more than three years is more than 10 percentage points below the benchmark, the performance compensation for the fund manager will decline significantly.
China Merchants believes that after strengthening the restrictive effect of performance benchmarks, the overall industry allocation of public funds may narrow the differences with the industry distribution of benchmark indices in the medium to long term.
According to statistics from HTSC, as of the first quarter of 2025, there are a total of 2,875 public funds holding Hong Kong stocks, with a total scale of Hong Kong stock holdings amounting to 859.2 billion HKD, accounting for 18.7% of the total holdings of southbound funds and 3.7% of the free float market value of Hong Kong stocks.
These public funds can be divided into two categories: funds that specifically invest in Hong Kong stocks, and funds that invest in both Hong Kong stocks and A-shares (at least).
For funds that aim solely at Hong Kong stocks, the proportion of passive funds exceeds 90%, and the reform plan has little impact on them. Currently, there are a total of 114 public funds focused on investing in Hong Kong stocks, with a holding scale of 161.5 billion, accounting for 18.8% of the total Hong Kong stock holdings of existing public funds and 0.7% of the free float market value of Hong Kong stocks. Among them, the scale of actively managed Hong Kong stock funds is less than 15 billion, which has little impact on over-allocation and under-allocation of stocks.
If there are shareholding reductions, the pressure also comes more from funds that use both A-shares and Hong Kong stocks as benchmarks, or even funds that only use A-shares as a benchmark but also invest in Hong Kong stocks. The proportion of funds that over-allocate Hong Kong stocks compared to their benchmarks is 5.9%, but it only accounts for about 0.5% of the free float market value of Hong Kong stocks.
HTSC selected funds that track the Hang Seng Index and the CSI Stock Connect Hong Kong Index as samples. The total size of these funds' positions in Hong Kong stocks is about 400 billion Hong Kong dollars, covering more than 70% of the size of funds that invest in both A-shares and Hong Kong stocks, making it somewhat representative. From a bottom-up calculation, this portion of funds has a share of positions in Hong Kong stocks that is higher than the benchmark, totaling 105.3 billion.
At the industry level, there is an over-allocation in the Hong Kong stock sectors of media, electronics, and retail, while there is an under-allocation in the banking, non-bank financial, and transportation sectors.
HTSC believes that a technical reduction in holdings does not change the positive outlook for the Hong Kong stock market. Even if there is a possibility of the aforementioned shareholding pressure appearing, optimism for the Hong Kong stock market remains. One characteristic of the Hong Kong stock market is its diversified and varied investor structure, and technical adjustments caused by factors other than fundamentals instead provide investors with opportunities for value recovery. Moreover, considering the increasing demand for excess returns by publicly offered funds, adding Hong Kong stocks to portfolios may be a very important option. HTSC calculates that whether adding the Hang Seng Stock Connect Hong Kong Index or the Hang Seng TECH Index to the CSI 300 allocation, a better risk-return ratio may be achievable compared to solely allocating to the CSI 300 Index.
Regarding the current situation in the Hong Kong stock market, BOCOM INTL believes that both internal and external conditions are improving positively, and Hong Kong stocks are expected to welcome positive catalysts, still focusing on three main lines: 1) Continue to be bullish on the theme of technological innovation, including tech hardware (semiconductors, new energy automobile industry chain, etc.) and Internet technology (AI, Cloud Computing, etc.), which are expected to benefit from dual drives of policy support and demand growth. 2) High dividend line: Given that external uncertainties remain relatively high, along with a loose liquidity and low interest rate environment, the attractiveness of high dividends will continue to increase; attention should be paid to banks, public utilities, and telecommunications operators. 3) Policy dividend line: In a context of reserve requirement ratio cuts and interest rate reductions, brokerages, insurance, and other financial service institutions will directly benefit from increased market activity and a recovery in risk appetite, along with Hong Kong's high-quality consumer leaders expected to benefit from the sustained implementation of consumer support policies.
