In 2024, global market volatility intensified, yet FOFs (Funds of Funds) demonstrated remarkable resilience thanks to their diversified investment strategies.

As of December 20, 38 publicly offered FOFs reported annual returns exceeding 10%, highlighting their superior performance in uncertain timesThrough covering various asset classes such as global equities, bonds, commodities, and alternative strategies, FOFs effectively leveraged their structural advantages to diversify investment risks and ensure robust portfolio performance.

In response to the extreme divergence in A-shares and global stock markets, fund managers actively adjusted their asset allocations, particularly increasing their weight in ETFs (Exchange-Traded Funds) to achieve a flexible investment strategy

Looking ahead, fund managers appear optimistic about the investment potential in the A-share market, predicting further optimization of their asset allocations by 2025, especially in the realms of value dividends and growth stylesUtilizing diversified tools like ETFs, FOFs are set to capture opportunities in turbulent market conditions, thus achieving sustained steady growth and excess returns.

Steadfast Progress in a Volatile Market

As the year draws to a close, many FOF fund managers reflect on the market's events and assert that this year, in a wavering market, FOFs displayed relative advantages in product design.

Sang Lei, head of the FOF strategy group at China Europe Fund, noted that before mid-September, the performance of major asset classes reflected market expectations

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For instance, Chinese bond yields declined while dividend stocks and AI sectors, which are closely linked to the US market, performed admirablyThis stark division between styles and sectors contributed to a prolonged negative cycle that only began to ease by late September.

In this split environment of A-shares and global stock markets, fund managers faced a dilemma between maintaining long-term value-based allocations and following short-term market stylesSang further analyzed that the current market environment poses two significant challenges to long-term investment strategies: firstly, limited investment opportunities; and secondly, rapid shifts in sectors and styles, leading to considerable divergence in investment behaviors among fund managers, complicating fund research and style allocations.

Li Wenliang, general manager of the FOF investment department at Southern Fund, believes that despite a potential global surge in stock and bond markets in 2024, short-term volatility in single assets remains pronounced, enhancing the appeal of FOFs' multi-asset and multi-strategy allocation model

By incorporating global equities, bonds, commodities, and alternative strategies, many FOFs managed to suppress net value fluctuations in the short term.

Moreover, Jiang Hong, a fund manager at Invesco Great Wall's retirement and asset allocation department, expressed that 2024 will witness significant domestic and international market volatility, with numerous factors such as Federal Reserve policies and exchange rates considerably impacting global marketsBenefiting from their diverse asset allocation strategies, many FOFs exhibited pronounced effectiveness in mitigating drawdownsNumerous FOF products extended beyond the traditional stock-bond configuration, actively investing in commodity ETFs and QDII products, contributing significantly to the stabilization of portfolio performance.

Effective Balanced Allocation

Reflecting on operations throughout 2024, Sang Lei believes he achieved overall success in asset allocation

This year, he adhered to a long-term asset allocation strategy, maintaining confidence and optimistic expectations in a turbulent A-share market.

However, changes in market conditions pose new challengesSang pointed out that the persistent divergence in the market has made it challenging to allocate certain industry sectorsThis year he adjusted allocations within specific sectors to achieve a more balanced distribution of equity assets in his portfolio, reducing deviations between the equity allocation structure and that of equity mutual fund indices.

Similar to Sang, other fund managers are also actively responding to market shifts

Li Wenliang noted that throughout 2024, he and his team maintained the FOF product's multi-asset, multi-strategy model, ensuring relative stability in net value amidst substantial price fluctuations in single assets.

Li elaborated, asserting that such strategies help uphold effective contrarian investment approachesThis allows opportunities to invest earlier during significant price declines of specific assets, increasing positions to capture potential upward momentum during recovery processes.

Jiang Hong also pointed out that this year showed marked shifts in market styles; particularly before September, dividend and value styles performed well, while a rotation to growth styles took precedence after late September

Accurately discerning these style changes significantly benefits FOF performanceAdditionally, given the US's leadership in the AI revolution, increasing allocations to US stocks, especially the NASDAQ, proved to be a successful strategyThe gold market showcased overall low volatility yet high returns, indicating that substantial allocation within portfolios could foster gains.

Specifically, Invesco Great Wall Fund adopted corresponding strategy adjustments during different market phasesBefore September, their products achieved solid investment returns in dividend styles, while those favoring technology and growth exhibited stronger returns post-SeptemberThe company also had low-volatility strategy products that effectively captured opportunities within the bond market and controlled drawdowns through hedging and portfolio heterogeneity.

Rising Proportion of ETF Allocations

Discussing the heightened focus on ETF allocations this year, Sang Lei shared that ETFs now constitute a significant portion of his portfolio, spanning categories including bond ETFs, broad-based equity ETFs, sector-specific equity ETFs, commodity ETFs, and foreign equity ETFs.

While Sang believes that actively managed funds can yield significant excess returns over the long term, he acknowledges that in unfavorable market conditions where active funds struggle to outperform benchmarks, he plans to increase ETF allocations within his FOF

If active funds face difficulties in achieving excess return benchmarks or have shorter investment horizons, ETFs will become his preferred alternative.

Li Wenliang also emphasized that as capital markets mature, the proportion of institutional investors continues to rise, leading to increased pricing efficiency of domestic equity assetsConsequently, achieving excess returns through active stock picking has become more challengingTherefore, increasing allocations to equity index ETFs within FOF portfolios is a sound long-term strategy.

Moreover, during phases when the credit spread temporarily narrows, bond index ETFs become fitting investment tools

Given the complexities of cross-border asset allocation, fund managers also prefer using passive index ETFs to capture long-term beta returns in foreign marketsOverall, the proportion of allocations to passive index ETFs within the FOF sector is anticipated to rise gradually.

Jiang Hong conveyed that in recent years, FOF teams have been actively increasing ETF allocations, especially using ETFs and other passive investment tools for macro asset allocation and sector rotationThey also employ commodity ETFs and QDII assets to contribute to heterogeneous large-scale asset allocation, effectively reducing portfolio volatility.

They have noted a marked rise in ETF allocations among market participants this year, highlighting its role as a critical allocation tool

Looking ahead to the next year, Jiang mentioned that they would not decrease their ETF allocation proportions but would actively seek out active fund managers capable of generating excess returns.

Positive Outlook for A-share Investment Opportunities Next Year

During this interview, several fund managers shared their insights into future market trends and allocation strategies.

Sang Lei expressed his unwavering confidence in the investment value of the A-share marketSince late September, confidence in the A-share market has gradually restored, as current factors influencing it seem more reflective of market structure and sentiment than macroeconomic conditions

Despite a swift short-term rise in the A-share market, overall valuations remain low, implying relatively higher investment cost-effectivenessIf sectors boasting global competitive advantages within A-shares continue gaining recognition among domestic and international investors, the market is poised for a sustained upward trend, creating a virtuous cycle.

Li Wenliang agreed, noting that with the reinforcement of China's growth-stabilizing policies and continuous introduction of favorable capital market policies, the value of allocating domestic equity assets is gradually becoming evidentAlthough economic recovery still requires further affirmation, the cost-effectiveness of equity assets compared to fixed-income assets is currently at a historically high level.

Hence, from a relative return perspective, it is essential to place significant emphasis on the allocation value of equity assets, particularly as the fourth quarter commences a valuation restoration trend