Despite the vast majority of active funds outperforming their passive counterparts, Chinese investors continue to opt for the latter, according to a Morningstar report.
Through the end of June 2020, 80-90 percent of mainland-domiciled stock-heavy active funds survived and outperformed their average passive peer on a one, three five and 10-year basis, according to Morningstar which noted that this was record-high «success rate» since the report was launched in 2018.
The fund research firm defines success rate as the percentage of funds that continue to be in operation while generating excess return relative to the equal-weighted average passive fund return over a certain period.
One, three, five and 10-year success rates all climbed by 14.8, 17.4, 5.4 and 1.9 percentage points, respectively, compared to 2019-end results.
Investor Efficiency
«Amid the current economic uncertainty and geopolitical tensions, such finding certainly reflects some expected risk aversion, but also some potential misunderstanding among investors about the difficulty of finding active managers that can outperform indices in uncertain times,» the report noted.
But the tendency to underperform is not limited to cases of risk aversion with mainland investors also renowned for excessive speculative tendencies when sentiments are buoyant.
One example amongst many was the recent blockchain-linked rally sparked one day after President Xi Jinping called for greater research and investments in the space. This led 70 listed tech stocks to surge beyond the daily limit while state-owned media «People's Daily» attempted to inspire calm in a commentary that said that «[t]he future is here for blockchain, but we need to stay rational».
Market Efficiency
Similar to other emerging market peers, lacking market efficiency in China also creates opportunities for stock-pickers to outperform. In the U.S., for example, just 48 percent of active funds survived and outperformed their average passive peer in 2019, according to Morningstar – a significantly lower outperformance rate.
This is further intensified by the fact that mainland China’s equity markets are dominated by retail investors compared to developed markets which tend to have higher large institutional investor participation. Retail investors represent over 80 percent of daily A-share trading volume.
