The world of investment is witnessing a significant shift as public fund of funds (FOF) increasingly moves away from the traditional model that heavily relied on active fund managers towards a new age dominated by passive investment strategiesThis trend gained notable momentum with the finalization of performance results for the past year, which saw passive index funds becoming the cornerstone of returns for many FOFsWith the efficiency of stock markets improving markedly, there is a widespread belief that this signifies the dawn of a new era—one where passive investing reigns supreme.

The statistics tell a compelling story; reports indicate that in 2024, the top-performing FOFs achieved astonishing returns, with the highest performer, Shenwan Hongyuan's Pension Target FOF, yielding over 17%. Data from Wind highlights that the triumvirate of leading performers consisted of Shenwan Hongyuan, Penghua Yicheng Active FOF, and Zhongou Huixuan Mixed FOF, boasting returns of 17.14%, 16.60%, and 13.34% respectively

Other noteworthy FOFs such as Southern Pension FOF and Guofu Pension FOF also performed well, each surpassing a 12% return, putting them among the ranks of the best performers in the market.

An analysis of the sources of performance reveals an interesting pattern: the successful FOFs are predominantly investing in index funds rather than opting for the traditionally favored star fund managersFor instance, Shenwan Hongyuan's Pension Target FOF has in its top ten positions nine backed by passive investment ETFs, primarily focusing on the Guozheng 2000 ETF and the Zhongzheng 1000 ETFSimilarly, the second-ranked Penghua Yicheng Active FOF has a strong preference for index options, holding six ETFs against only three actively managed equity funds in its top ten positions.

This is a far cry from the previous norm where active equity funds were given precedenceFor example, the Zhongou Pension FOF, which historically invested heavily in actively managed funds, shifted its strategy significantly in the last year, transitioning from a roster comprising multiple star managers to one entirely filled with passive funds

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This pivot demonstrates a broader trend where the traditional reliance on active strategies is being reevaluated in light of recent performance metrics.

Investment professionals are observing this transformation with keen interest, suggesting that as market efficiencies increase, the potential for generating excess returns through active management is diminishingThe personal factors associated with individual fund managers are becoming less significant, and their effectiveness is under continuous scrutinyThe emphasis appears to slowly move towards a model where the merits of fund returns are dictated more by strategic choices rather than the whims of individual managers.

Additionally, the stability of fund styles is coming into focusPublic FOFs are shifting their selection strategies from identifying actively managed equity products to directly purchasing index funds, largely due to the lack of consistency in fund manager performances

The frequent changes in manager performance make it challenging to maintain a strategy that relies heavily on individual talent.

To provide some context, there are very few fund managers who have been able to escape the cycle of volatility, manifesting often as erratically changing performances that can ruin expectations based on past performanceFor example, a renowned fund manager from Southern China gained notoriety in 2021 with remarkable doubled returns, only to face staggering losses exceeding 40% across the subsequent three yearsThis inconsistency exemplifies the risks involved in relying heavily on active management.

Moreover, FOFs often confront sudden shifts in the styles of the funds they select, leading to dramatic fluctuations that can clash with initial investment strategiesA case in point involves a debt-oriented hybrid fund that was expected to maintain a conservative stance but instead has drastically altered its profile following a new manager's appointment, veering into more aggressive equity investments.

The rising number of fund manager changes, especially as seen towards the end of 2024, further underscored this volatility

Numerous debt hybrid funds announced transitions in leadership, bringing on board managers known for their robust equity strategiesThis change raises red flags for FOFs that had previously positioned themselves conservativelyFor instance, a fund that maintained a zero stock position rapidly shifted to averaging above 51% in stock exposure, predominantly funneling into high-growth technology sectors post the managerial change.

This development indicates that as the style of fund products becomes increasingly unpredictable, public FOFs find themselves obligated to confront an ever-changing landscape when making investment decisionsConsequently, transparent and predictable passive index funds are emerging as the preferred choice within public FOFs.

Cost efficiency plays a pivotal role in this transitionOpting for index funds not only alleviates the burden associated with extensive fund research but also capitalizes on the proven performance trends of passive funds outperforming their actively managed counterparts

As identified by an FOF investment executive in Shenzhen, conducting thorough due diligence—often involving numerous discussions with fund managers—significantly escalates research costs without eliminating discrepancies that may arise between promised and actual performance.

The inclination towards index funds is not merely about reducing expensesIt represents a paradigm shift where the potential for stable performance alongside lower costs becomes attractiveOnce FOFs embrace this passive route, research expenditures drop substantially as index funds usually exhibit consistent operational practices, leading to straightforward investment evaluations.

Industry observers assert that the landscape of public FOFs is evolving to embrace index-based investingInvestors are transitioning from picking individual stocks to embracing ETFs, moving away from short-term trading towards long-term investment strategies, and favoring diversified portfolios over concentrated holdings