Over the past decade, the domestic bond market has grown rapidly, with the total size increasing from 48 trillion yuan in 2015 to the current 164 trillion yuan, a 242% increase. The proportion of bond balance to the annual GDP has also risen from 70% in 2015 to 124% by the end of 2023. The expansion of the bond market has provided a vast stage for the significant development of bond funds. Over the past ten years, the scale of bond funds has grown from 0.7 trillion yuan to the current 10.6 trillion yuan, making it one of the most rapidly growing asset management directions. (Data source: Wind, as of 2024/6/30)
To date, the categories of bond funds have become very rich, with sub-categories such as short-term bonds, medium-short-term bonds, medium-long-term bonds, passive bond funds, primary bond funds, secondary bond funds, and convertible bond funds, each with various investment strategies, and all have generally received good market feedback. In recent years, with the continuous advancement of high-quality development, the interest rates of various bond assets have gradually decreased. In the overall low-interest-rate environment, the expected return rate of bond funds is declining, and the space for excess returns provided by active management is also narrowing. Investors will pay more attention to the characteristics and advantages of the product itself when choosing bond funds. Among them, passive bond funds, due to their high transparency, stable style, and risk diversification, are increasingly receiving investor attention and have become a key direction for fund companies to focus on research and development and layout.
We have found that if a suitable and vibrant index can be selected, the long-term performance of passive bond funds will be quite eye-catching. In addition, passive funds also have the operational advantage of low fees, and they are convenient for trading, allowing investors to quickly adjust their positions according to their own needs. Therefore, whether it is from the arrangement of product design, the convenience of investor operations, or the actual investment returns obtained, passive bond funds have strong market competitiveness.
Looking at international experience, as the world's largest bond market, the scale of bond funds in the United States was about 6 trillion US dollars in 2023, with active bond funds, bond ETFs, and index bond funds accounting for 59%, 25%, and 16%, respectively. From the structural proportion, passive bond funds accounted for more than 40%. More importantly, looking at the compound annual growth rate over the past five years, bond ETFs and index bond funds have reached 18% and 9%, respectively, far exceeding the 1% of active bond funds (data source: Morningstar Direct, as of November 2023). Analyzing the reasons behind this, on the one hand, it is because of their transparency, stability, low cost, and good liquidity, which have been widely welcomed by investment advisory businesses and institutional investors; on the other hand, in the long run, the after-fee returns of passive bond funds have strong competitiveness.
From domestic experience, passive funds in the equity market have also developed rapidly. Wind data shows that their scale has increased significantly from 0.6 trillion yuan in mid-2019 to 2.1 trillion yuan in June 2024, and the number of products has grown from 520 to over 1,600. The product strategy has further diversified, with both traditional leading broad-based products such as the CSI 300 and many emerging industry and thematic investment varieties, greatly enriching the allocation needs of various investors.
At present, domestic passive bond funds have entered a period of accelerated development. According to Wind data, as of June 2024, the scale of passive bond funds is close to 1 trillion yuan, with 289 products, and the scale has nearly doubled in the past year. The product types cover major bond assets such as interest rate bonds, credit bonds, interbank certificates of deposit, and convertible bonds, and there have also emerged thematic funds such as green inclusive, regional, financial, central enterprise, and urban investment. Similar to exchange-traded index funds, bond ETFs have also developed rapidly in the past two years. As of the end of June 2024, the scale of domestic bond ETFs is close to 110 billion yuan, doubling from the beginning of 2023, with several products breaking through the scale of 10 billion yuan (data source: Wind). Looking to the future, passive bond funds have a broad development space, and there is still a significant possibility for product innovation in many sub-strategies. Especially after the official implementation of the new capital rules this year, institutional clients represented by banks have higher requirements for through measurement and capital conservation, which may bring new business opportunities.
In terms of investment methods for passive bond funds, Huitianfu has proposed a strategy called "passive active investment." The so-called passivity is to invest within the scope of product positioning and contractually agreed investment, maintaining the stability and clarity of the investment style. The so-called activity refers to active management under established investment requirements, leveraging the professional advantages of fund managers to strive for excess returns. This concept is very suitable for passive bond funds because, unlike the equal proportion replication of stock index funds, due to the large differences in liquidity of individual bonds in the bond market, non-continuous transactions, and restrictions on the minimum transaction unit, passive bond funds mostly use a sampling replication method to track the index. In investment practice, on the one hand, it is necessary to track the benchmark index and keep the tracking error within a reasonable and controllable range; on the other hand, it is necessary to do a good job of "passive active management" in the process of sampling the index sample bonds, striving to achieve investment performance that exceeds the benchmark index through the differentiated construction of the portfolio holding structure. From the actual operation results of the past few years, the passive bond funds we manage have indeed achieved excess returns, creating a better holding experience for investors.
We have a long-term optimistic view of the development prospects of passive bond funds and have made a lot of preparations over the years. In terms of products, since 2018, we have increased the layout of fixed-income underlying assets and formed a multi-dimensional grid layout in the bond index field, including terms, ratings, varieties, and themes. In particular, the preferred investment-grade credit bond index fund established by our company in April this year has received high attention from the market. In terms of teams, we have formed a relatively mature and complete talent echelon system around passive bond funds, from research to investment, from trading to risk control, and from sales to operations. Looking to the future, we believe that with the further development of the domestic bond market and the fund industry, passive bond funds are expected to usher in greater development opportunities and provide investors with richer and more convenient bond investment products.