Long-term closed-end bank financial products, a practitioner of absolute return

2024-07-17

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This year, the phenomenon of "asset scarcity" has become increasingly severe, credit spreads have gradually narrowed, and the implementation of the "manual interest subsidy" ban has significantly increased the performance pressure on wealth management products. In addition, after a strong bull market in the bond market, the market has not been fully adjusted, indicating a potential space for future fluctuations. Against this backdrop, the importance of the absolute return capability of bank wealth management institutions has become more prominent. Institutions urgently need to enhance their investment research and multi-asset allocation capabilities, extend the investment horizon, anchor the absolute return target, and lead investors through the cycle with more stable returns.

I. Comparison of Investment Operation Strategies under Absolute Return and Relative Return Targets

"Absolute return" is not "certain return"; it is the goal of asset management products to achieve a positive absolute value of investment returns, pursuing stable returns in a volatile market, while relative returns focus more on the outstanding performance of product returns.

Bank wealth management has long adhered to the goal of absolute returns, and in terms of investment strategy, it tends to adopt a conservative approach, leading with low-risk assets such as bonds. By strictly rating credit and diversifying assets across multiple assets, sustainable investment strategies are implemented to achieve steady growth of assets while controlling risks. Among them, the long-term investment philosophy of bank wealth management does not focus on short-term market fluctuations but aims to achieve steady growth of assets through long-term continuous investment, which is more in line with the operation strategy of absolute return targets. On the other hand, public funds mainly aim for relative returns, focusing more on equity assets, and seek excess returns by dynamically adjusting the investment portfolio, especially during short-term market fluctuations, they will be more aggressive in seeking opportunities to increase returns.

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II. The Sufficiency and Necessity of Bank Wealth Management Anchoring to Absolute Return Targets

In terms of sufficiency, the advantages of bank wealth management licenses and the scale structure of products with different open forms enable bank wealth management to achieve absolute return targets through flexible multi-asset allocation means. On one hand, public funds can only invest in assets with relatively strong liquidity and higher levels of public information, such as bonds, stocks, and exchange-traded derivatives. However, bank wealth management can expand its investment scope to areas with low liquidity and low transparency, such as non-standardized debt, private debt, and over-the-counter derivatives. On the other hand, as of the end of April 2024, the scale proportion of closed-end net value-type products in bank wealth management was 20.2%, far exceeding the 12.4% of closed-end public funds, giving institutions more room for flexible asset allocation.

In terms of necessity, the structure of bank wealth management investors prompts bank wealth management to anchor to absolute returns to meet investors' demands for stable product returns. For a long time, investors with first and second risk preferences have held wealth management products at around 50%, and in the two years after the full implementation of net value of wealth management products, the proportion of low-risk preference investors has further increased. In addition, compared with public funds, bank wealth management has stronger inclusiveness and people-oriented characteristics, with individual investors holding an absolute dominant position. As of the first quarter of 2024, individual investors' holdings of wealth management products exceeded 90%, compared to less than 50% held by individual investors in public funds.

III. In long-term closed-end products, the absolute return strategy is fully reflected."Long-term dedication and persistent effort" - compared to short-term investments, investors who focus on long-term, enduring investments can better lock in absolute returns and achieve steady growth of their assets.

In the long run, long-term closed-end products [1] have relatively better average redemption yields, which better reflect the absolute return strategy of financial products. On one hand, long-term closed-end products can reduce redemption pressure caused by short-term market fluctuations, thereby enhancing the product's ability to withstand market volatility. On the other hand, it also allows financial institutions to adopt more aggressive investment strategies, focusing more on achieving the product's long-term return objectives. Data shows that between November 2022 and January 2023, financial products were affected by bond market fluctuations, and the redemption yields of products of various terms declined, with the long-term products experiencing a relatively smaller decrease in redemption yield. Further calculations of the monthly average redemption yield from November 2022 to May 2024 show that the monthly average redemption yield for long-term products is 3.79%, which is 24 basis points higher than that of medium-term products.

Looking at different types of financial companies, regional financial companies' long-term closed-end fixed-income products have better redemption yields than national stock financial companies, and their redemption yields are more stable during periods of volatility. Data indicates that from 2022 to May 2024, the monthly average redemption yield of regional financial companies reached as high as 3.71%, and during the period of net asset value breakage, the decline in redemption yield of regional financial companies was relatively small and could be quickly repaired.

Data from the past two months shows that the average redemption yield of long-term closed-end pure fixed-income products from several regional financial companies [3] has been outstanding. The recent two-month average monthly yields of Qingdao Bank Wealth Management, Chongqing Rural Commercial Bank Wealth Management, Nanjing Bank Wealth Management, and Shanghai Bank Wealth Management are all above 4%, with Qingdao Bank Wealth Management's recent two-month average yield reaching as high as 4.19%. In addition, during the period of net asset value breakage, the redemption yields of such products from several regional financial companies have also been relatively stable. For instance, after the net asset value breakage occurred, the redemption yields of long-term pure fixed-income closed-end products from Qingdao Bank Wealth Management, Anhui Bank Wealth Management, and Ningbo Bank Wealth Management have all been maintained above 4% for five consecutive months.