CICC: Cautiously optimistic about the sustainability of excess returns from active equity funds

China International Capital Corporation Research Report states that, looking ahead to 2026, CICC remains cautiously optimistic about the sustainability of excess returns from active equity funds. On the market level, emerging industry trends continue to emerge, and sector rotation accelerates, providing structural opportunities for active management; on the institutional level, new regulatory rules push for capability upgrades, and platform-based research systems safeguard stable excess returns; on the capital level, inflows of incremental funds are expected, while redemption pressures from existing funds marginally ease, potentially creating a positive cycle of “performance—scale.”

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CICC 2026 Outlook | Active Equity Funds: Learning from the Past, Riding the Momentum

Summary 2025 Review: Breaking Through the Fog, Recasting Value

Market side: The implementation of new regulations proceeds steadily, with new fund launches warming up and existing funds experiencing redemptions. In 2025, high-quality development regulations for public funds were implemented, with steady progress in benchmark-aligned strategies, floating fee rate pilots, and assessment system adjustments. The new issuance market experienced a gentle recovery, with popular products regaining attention; the scale of existing funds stopped declining and rebounded, with a 16.8% year-over-year increase. However, most of this growth was driven by an increase in the number of products and market appreciation boosting net asset values, rather than by profitability attracting capital. Overall market share still faces ongoing redemption trends, with nearly 80% of products shrinking in share.

Performance side: Profitability strongly rebounded, with significant sector differentiation. In 2025, active equity funds finally experienced a prolonged period of positive returns, with a median annual return of 29.8% and a median excess return of 14.0%, with 75 funds doubling their gains. Sector-wise, cyclical and technology themes led the gains, while consumer themes lagged. Style-wise, growth outperformed value, with small caps slightly leading. Investment approach-wise, subjective and quantitative strategies coexisted, with the former offering more flexibility and sharpness, and the latter showing advantages during volatile periods. Other features include mid-career fund managers performing well, with a combination of research experience and sharp thinking aligning with current market needs; top-performing funds tend to adopt “industry concentration + active rotation” strategies.

Allocation side: Hong Kong stock allocations surged and then retreated, with technology and growth leading the main themes. The overall allocation to Hong Kong stocks by active equity funds rose to a historical high of 17.0% in Q2, then fell back to 14.4% in Q4. Sector allocation showed clear characteristics: a strong focus on technology (38.2%, a record high), with increased positions in electronics and communications (+4.7% and +6.6%), while traditional consumer sectors like food & beverage and home appliances saw continued reductions (-4.0% and -2.8%). Reviewing recent investment themes, from consumer “certainty” to manufacturing “prosperity” to technology “innovation premiums,” reflects China’s economic structural transformation and evolving market aesthetics.

Institutional side: The top-tier landscape remains relatively stable, with firms like E Fund, China Europe, GF Fund, GF Securities, and Harvest Fund maintaining leading positions; Yongying Fund leapt from 43rd to 10th place by pioneering “smart selection and technology leadership,” becoming the biggest dark horse of the year; AVIC and Debon adopted “single-point breakthrough” strategies, while Guojin and Bodao employed quantitative strategies, achieving rapid growth in assets and rankings. Breakdown of scale growth shows that leading institutions’ increases are mainly driven by net asset value appreciation, with net capital outflows; dark horse funds’ growth is mostly driven by net subscriptions, with Yongying and AVIC contributing over 60% of their scale increase from net inflows. The competitive landscape continues to favor the strong and intensify the competition among mid-tier players.

2026 Outlook: Innovate and Reinvent, Uphold Quality and Depth

Can excess returns continue? Looking ahead to 2026, we remain cautiously optimistic about the sustainability of active equity funds’ excess returns. On the market level: emerging industry trends keep emerging, and sector rotation accelerates, providing structural opportunities for active management; on the institutional level: new regulatory rules push for capability upgrades, and platform-based research systems ensure stable excess returns; on the capital level: inflows of new funds are expected, while redemption pressures from existing funds ease, fostering a positive cycle of “performance—scale.”

Why will scale expand? From the capital inflow side: 1) New niche funds filling gaps in ETFs (such as humanoid robots, overseas computing power), capturing sector beta with sharpness; 2) Long-term, steady-performing general market or style-selecting products led by veteran managers, winning trust through “stable alpha.” From the outflow side: 1) The halo of top funds fading, with flagship products experiencing mass redemptions, reflecting changing investment paradigms and preferences; 2) Redemption behaviors becoming more rational, mainly driven by active rebalancing rather than panic selling. In summary, the drivers of scale growth in 2025 have shifted structurally: from “new issuance-led” to “performance-driven,” and from “star halo” to “sector focus.”

How can institutions break through? Clarify strategic positioning: leading firms should drive with “platformization” and “expertise,” playing a “stabilizer” role in the market; small and medium-sized firms should choose “dislocation competition,” deepening specialization in niche sectors and building professional barriers through boutique strategies. Strengthen investment engagement: to address the trust dilemma of “return and redemption,” institutions need to turn research capabilities into perceptible value for clients, gaining trust through clear positioning and maintaining confidence through continuous communication, creating a moat that passive products cannot replace. Product layout directions: “comprehensive bottom-up allocation products” with industry balance, stable styles, and strict risk control, aiming for long-term steady compound returns; and “strategic boutique products” with sharp focus, clear style labels, providing investors with tools to capture early industry trends.

(Source: First Financial)