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 are driving capability upgrades, and the development of platform-based research systems ensures stable excess returns; on the capital level, inflows of incremental funds are expected, while redemption pressures from existing funds are diminishing, 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: Emerging from the Fog, Rebuilding 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 fund 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 product numbers and market appreciation boosting NAVs, 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 long-awaited rebound, with a median return of 29.8% and a median excess return of 14.0%, with 75 funds doubling their returns. Sector-wise, cyclical and tech 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 strong performance from mid-generation fund managers, whose combination of research experience and sharp thinking aligns well with current market conditions; top-performing funds tend to adopt a “sector concentration + active rotation” strategy.

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 in active funds rose to a record high of 17.0% in Q2, then fell back to 14.4% in Q4. Sector allocation showed clear characteristics: a 38.2% allocation to tech, reaching a historical high, with electronics and communications increasing by 4.7% and 6.6% respectively; non-cyclical sectors like food & beverages and home appliances saw continued reductions, decreasing by 4.0% and 2.8%. Reviewing recent investment themes, from consumer “certainty” to manufacturing “prosperity” to tech “innovation premiums,” reflects China’s economic structural transformation and the evolving market aesthetic.

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 jumped from 43rd to 10th place by leveraging “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 top institutions mainly grew through NAV appreciation, with net outflows; dark horse funds’ growth was largely 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 side: emerging industry trends will continue to emerge, and sector rotation will accelerate, providing structural opportunities for active management; on the institutional side: new regulations will push capabilities upward, and platform-based research systems will support stable excess returns; on the capital side: inflows of new funds are expected, while redemption pressures from existing funds will ease, fostering a virtuous cycle of “performance—scale.”

Why will scale expand? From the capital inflow perspective: 1) New niche funds filling ETF gaps, such as humanoid robots and overseas computing power, capturing “sector beta”; 2) Long-term, steady-performance veteran products across the market or style-based stock picking, winning trust through “stable alpha.” From the outflow side: 1) The fading of past star halo, with flagship products experiencing mass redemptions, reflecting shifts in 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 are shifting structurally: from “new launches dominate” to “performance-driven,” and from “star halo” to “sector focus.”

How can institutions break through? Clarify strategic positioning: leading firms should leverage “platformization” and “expertise” to act as market “ballasts”; small and medium-sized firms should pursue “dislocation competition,” deepening specialization in niche sectors and building professional barriers through boutique strategies. Strengthen investment engagement: to address the trust dilemma of “returning capital and redemption,” institutions need to translate research capabilities into perceptible value for clients, with clear positioning to earn trust, ongoing communication to build confidence, and create a moat that passive products cannot replace. Product layout directions: “defensive and balanced core allocation products,” with industry balance, stable styles, and strict risk control, aiming for long-term steady compound returns; and “sharp, strategy-focused boutique products,” with refined investment fields and distinctive style labels, providing investors with tools to capture early industry trends.