The wind direction of A-share 2024 is hidden in this "big beta of the times".

Every time at a major time node at the end of the quarter, the major holdings of public funds will be taken out and speculated over and over again. 

Although the stock selection ability of fund managers has been ridiculed in various ways, it is undeniable that the trend of public funds represents the beauty pageant standards of institutions in this market. 

In other words, you can question their integrity, but you really can't say that they are dish, especially when the choices of such a group are surprisingly consistent. 

The Great Beta of the 01 era

A single individual, or even a whole group, is actually very small in the face of the great waves of the times. 

It's a big story, but everyone doesn't live in a vacuum. 

This chart is taken from the report "Learning from the Past and Knowing the Future: Comparison of the Development of the Mutual Fund Market in China and the United States" by China Merchants Securities, with the top light color being a currency fund and the bottom being a dark red fund being an equity fund. 

From the situation of the U.S. market, before the 70s of the last century, the public fund market stocks are the absolute mainstream, accounting for more than 90%, from 1974, the proportion of money market funds increased year by year, until 1981 peaked, accounting for nearly 80%, and then the stock fund gradually recovered lost ground, this trend continued until 2000, and then the proportion of various products was basically stable, until 2015, the proportion of equity funds was close to 50%. 

It's very similar to what we're in now. 

Since 2008, the proportion of currency funds has increased year by year, reaching a maximum of 63% in 2018, and the proportion of equity funds has been compressed to less than 10% in recent years. 

Drawing inferences from one another, anyone can draw a tiger from a cat, but the difficulty is to know why, and we can only restore the environment at that time as much as possible. 

In the 70s of the last century, the U.S. monetary fund made a great leap forward, which had its own products, but it was more related to the sharp increase in the interest rate of U.S. Treasury bonds. Throughout the 70s, the U.S. 10-year Treasury bond interest rate peaked close to 16%, and the result of this interest rate was that there was no grass, and the U.S. stock market basically did not rise much in the 20 years of the sixties and seventies, which is also a classic historical case of inflation without a bull market. In this case, it is indeed difficult for equity to outperform money market funds as a liquidity tool. 

However, since 1981, the U.S. stock market has suddenly started a 20-year bull market, the Dow Jones Industrial Index has soared from less than 1,000 points to nearly 10,000 points, and the proportion of natural equity funds has increased year by year, and since 2000, the U.S. stock market has been sideways for 10 consecutive years, so the proportion of equity funds is basically stable. 

So you see, there is no alpha, and the reason why the years are quiet comes from the big beta of the times. 

If you study the public market, there is only one premise for the proportion of equity funds to increase, that is, the Shanghai Composite Index cannot at least fight a 3,000-point defense battle. 

02 The rivers and lakes of public funds

In the first half of 2023, the net asset value of China's public offerings under management reached 27.37 trillion yuan, surpassing the wealth management subsidiaries of banks to become the largest asset management institution in the market. The reason is that we can see the current environment, not that the public offering is growing too fast, but that the bank wealth management is lagging behind. 

The institutionalization that the A-share market has been hoping for has actually been slowly advancing. From 2015 to 2018, the ratio of public fund holdings to the free float market value of all A-shares has been around 8%. Since 2018, the proportion has increased year by year, and is currently basically maintained at around 15%. If the market doesn't change particularly much, this percentage is likely to remain stable. 

To add that, as shown in the chart above, our data is jagged, which is due to the disclosure issues of mutual funds. 

Mutual funds, like listed companies, have regular reports. Compared with listed companies, the public offering has an additional second quarterly report and four quarterly reports. According to the Administrative Measures for Information Disclosure of Publicly Offered Securities Investment Funds issued by the CSRC Order No. 158, quarterly reports are provided within 15 working days after the end of the quarter, interim reports, which are often referred to as interim reports, are provided within 2 months after the end of the first half of the year, and annual reports are provided within 3 months after the end of the year. For our research data, the biggest difference between the periodic reports is that the quarterly report only publishes the top 10 positions at the end of the quarter, while the interim report and the annual report will publish all the holdings at the end of the period, so there is a cliff-like decline in the amount of positions in the first and third quarterly reports, because the statistical caliber is different. 

The mutual fund industry is actually a very unique asset management category. 

Whenever the market rises and falls, fund managers will be pulled out to parade through the streets, or whipped corpses, or taken with small safflowers, to see all the Chang'an flowers in one day. In the entire financial industry, public offering is the most heavily regulated category, and there is no one. It's not because it's the most important, it's that the industry isn't typical finance at all. 

We now have a total of more than 160 licensed public funds, according to the financial reports of 79 companies that have been made public, public funds are more like manufacturing, and the financial industry is very different. 

The core of the asset management industry is high leverage, which is simply understood to be to use other people's money to do your own thing, and charge a fee in the middle. For example, the equity multiplier of CITIC Securities' 2022 annual report is 5.60, and the total asset turnover ratio is only 0.05, while the two figures of ICBC are 11.07 and 0.02, respectively, and Chinese Insurance is 6.55 and 0.43. These three companies are representatives of securities companies, banks and insurance companies, and their common feature is high equity multiplier, that is, high leverage. 

The equity multiplier of the public fund is not high, the median is only 1.5, and the total asset turnover rate is 0.41, these two indicators are basically the same as the situation of the A-share manufacturing industry, and the public fund is better than the manufacturing industry is that the net profit rate of sales is slightly higher, with a median of 20%, while the net profit margin of the A-share manufacturing industry is less than 10% of the sales net profit margin of more than 20%. 

The financial industry needs a license to practice, and with a license, you can reasonably and legally leverage it, which is the source of the value of the license. Although the number of public funds is not large at present, the public fund license is probably the least valuable, because from the perspective of financial indicators, this industry volume is the same as that of the manufacturing industry. 

Of course, the worthlessness of a public offering license and the income distribution of practitioners are two different things. There is a 28 phenomenon in any industry, 20% of people get 80% of the industry's income, and the public fund industry may be more extreme, such as Lanlan, Kunkun, and Cai Gou. 

03 Changes in the allocation of the public offering industry

Rather bend than bend, do not do wall grass, is the classical culture of the requirements for life, the study of public positions is not, is the professional study of wall grass. 

The public offering position is the grass on the wall, and the grass will fall in whichever direction the wind blows. The direction in which the grass is falling now does not mean that the wind will continue to blow in this direction, it just tells you the direction of the wind now. 

Industry allocation is the core of public offerings. Because of the limitation of scale, the representative who has to adhere to long-term value investment, the source of long-term income of public offering positions is industry allocation. 

Industry allocation is actually very confusing, because the market value of A-shares, the market value of free float, and the market value of public offerings are three completely different concepts. 

I'll give you a simple example and you'll get the idea. 

Industrial and Commercial Bank of China, the largest bank in the universe, as of November 24, the closing price was 4.80 yuan, with a total share capital of 356.4 billion, and the market value obtained by multiplying these two numbers was 1,710.7 billion, which is the concept of total market capitalization. The problem is that the vast majority of these total share capitals will not be traded in the market, such as Central Huijin, which holds 123.7 billion shares, and the Ministry of Finance holds 111 billion shares. The number of shares that can be circulated in the market is only 33.9 billion shares, accounting for less than 10% of the total share capital, which means that although the total market value of ICBC exceeds 1.7 trillion yuan, the actual market value in the market is only more than 160 billion yuan. 

Not only that, the most influential indices in this market are all set up on the basis of free float market capitalization, such as CSI 300, CSI 1000, Shenzhen Component Index, ChiNext Index and so on. The only thing that is more special is probably the Shanghai Composite Index, which is weighted by total market capitalization. 

As of November 24, the total market value of A-shares is 89.27 trillion yuan, and the free float market value is 35.69 trillion yuan. 

Of the different weighting methods, the most influential is the banking industry. Judging from the data at the end of the third quarter of 2023, among all 31 Shenwan industries, banks account for 10.5% of the total market capitalization, and only 5.9% of the free float market capitalization, which is the abrupt thorn in the upper left corner of the figure above. 

The caliber we use is the free float caliber, after all, the total market value looks good, but it has little to do with trading. 

From the perspective of free float market capitalization, the gap between the proportions of various industries is not as big as imagined, more than 8% have three industries, medicine and biology, electronics and power equipment, 5%-8% have a total of five industries, food and beverage, computers, non-bank finance, banking and machinery and equipment. 

However, the industry distribution of public offering positions is obviously very concentrated. Food and beverage, medicine and biology, electronics and power equipment, commonly known as the four major schools, each industry holds more than 10%, and the total position of the four industries is close to 50%. 

As the old saying goes, men are afraid of getting into the wrong business, and women are afraid of marrying the wrong man. Now that men and women are equal, everyone is afraid of falling into the wrong profession. According to the data of the Securities Industry Association, the number of brokerage analysts in 2023 has exceeded 4,000, and for these industries at the bottom of the ranking, the result of entering the industry may be that the road is getting narrower and narrower, because the buyer's commission mainly follows the industry. 

The industry allocation of public offerings can be summarized by two principles. 

One is Warren Buffett's most admired ROE indicator, which is that in the long run, the return on stocks is basically equivalent to the long-term ROE. This is the basis for large consumption investment, because food and beverage, mainly liquor, and the pharmaceutical and biological industries, are all high-ROE industries. 

Since the third quarter of 2017, the proportion of the food and beverage industry in public offering holdings has remained above 10% for most of the time, and the peak was close to 18% in the first quarter of 2021. 

The source of high ROE in the food and beverage industry other than liquor is the channel, the channel of this industry needs long-term continuous investment, once it is completed, there is a strong scale effect, although the sales net profit margin level is average, but the asset turnover rate is usually more than 1, which is more than double that of the general listed company, and the ROE level will be higher than that of the general enterprise. For example, Yili shares and Taoli bread are such a number. 

As the king of A-share liquor, the high ROE relies on the net profit margin of sales, for example, the net profit margin of Kweichow Moutai is close to 50 points, and Wuliangye is 35 points, which really stands out from the crowd in A-shares. 

If Buffett is in China, Kweichow Moutai will also be like Coca-Cola, becoming his heavy stock at the bottom of the box. 

The food and beverage industry seems to be a priority for growth, but it does afford, low-key luxury has connotations, Nongfu Spring's Zhong Sui, in Hurun's 100 richest list, is already the third richest man in China. 

Pharmaceutical biology is also a high ROE industry, and unlike food and beverage, this industry has been a public offering of heavy stocks from the beginning, even if the industry fluctuates, going around and around, the proportion has not fallen below 10%. 

There is a common pattern in the proportion of public offerings in the pharmaceutical and biotechnology and food and beverage industries, that is, the phenomenon of 16%, and every time the proportion of the industry exceeds 16% in a certain quarter, it indicates the arrival of a high point. For example, the second quarter of 2020 in the pharmaceutical and biological industry and the first quarter of 2021 in the food and beverage industry are the high points of long-term public offerings. 

As an evergreen tree in public offering, the source of high ROE is essentially a channel. Downstream hospitals are a unique channel in this industry, and they also bring a higher net profit margin on sales. 

Charlie Munger made this request in his "Poor Charlie's Book": "Give a few examples to show that if you want to increase sales, the right thing to do is to raise the price". Munger gave four types of answers, with Munger's favorite answer being the fourth, "Raise prices and use extra profits to promote sales in illegal or unethical ways, such as bribing trading brokers, or other practices that are harmful to the end consumer – such as sales rebates for open-end funds." 

In the book "Return on Capital" of the research cycle, the problem of "dual agency" is also mentioned, that is, "when consumers lack understanding and rely mainly on intermediaries, the normal connection between suppliers, intermediaries, and consumers is distorted." In many cases, the link between intermediaries and product providers has developed to such an extent that a tacit alliance has formed between them to exploit the ignorance of consumers". The authors summarize this phenomenon by saying: "Conflicts of interest in the business world can sometimes be beneficial to investors". 

The second principle of public offering industry allocation is to chase growth. This principle can be summarized by the theory of John Berger, the father of index funds, that the long-term return of a stock can be split into three parts: dividend yield, earnings growth rate, and price-earnings ratio growth rate. If the dimension is stretched a little longer, the P/E growth rate will also disappear, and the long-term return of the stock will be left with two parts, dividend yield and earnings growth rate. The ultimate pursuit of big consumption is dividend yield, and for growth stocks, dividends are dispensable, and investing in stocks is for growth. 

The typical growth industries of A-shares are electronics, power equipment, and computers. 

Liquor and medicine stand tall on the highlands of mass consumption, and people have always come and gone on the growth position.

Real growth has always been very scarce, otherwise the allocation of the power equipment industry would not have increased from 4% in the second quarter of 2020 to 16% in the third quarter of 2021 in just one year. 

The big bull market of 2015 that we miss is of course focused on TMT, mainly computers. When the growth logic of computers was falsified, it began to go all the way down, and the lowest point was the second half of 2017, with configuration accounting for less than 4%. The next low came in the first three quarters of 2022, also falling below 4%. 

The reason why the valuation of the computer industry is very high and the market heat has remained high is that the pie in this industry is easy to draw big and round. This is certainly not a flaw, according to Metcalfe's law, the value of a network is equal to the square of the number of nodes within the network, and the value of the network is proportional to the square of the number of users connected to the network, and it is this law that opens the ceiling on the valuation of the computer industry. Since 2015, although the allocation of public offerings to the computer industry has declined rapidly, it is undeniable that in these years, new concepts about computers have emerged one after another, each of which seems to be about to bring a revolution, from the metaverse, blockchain, to this year's AI. 

In 2023, the first question that the entire institutional circle generally reflects on is why it missed the AI market at the beginning of the year. To this end, the strategy of some brokerages, such as Zheshang, has also launched a series of U.S. stock mapping tracking, the starting point is to see what U.S. stocks are speculating on now, and what will be the next hot spot in A-shares. From the perspective of chips, it is true that in the first three quarters of 2022, the proportion of public allocation of computers has fallen below 4%, and there is a demand for a rebound. 

Stocks in the power equipment sector are currently in a state of flux. Starting from the third quarter of 2021, for five consecutive quarters, the public offering ratio of the power equipment industry has basically been above 16%, but it still can't bear the ceiling of 16%, and by the third quarter of this year, the proportion has fallen to 11.1%. From a fundamental point of view, the international demand of the lithium battery industry is at hand, the power generation efficiency of the photovoltaic industry is far from the ceiling, and hydrogen energy has just emerged. 

As for electronics, in the long run, the overall allocation ratio of the electronics industry has increased, but from 2017 to 2019, it has experienced a large drawdown, falling from 10% to less than 6%. The allocation in the third quarter of 2023 accounts for nearly 12%, and there may not be much room for further improvement in the future. 

Compared with the proportion of the free-float market capitalization industry, the overweight and underweight ratio of the public offering industry is as shown in the figure above. The four major food and beverage, medicine and biology, electronics and power equipment are more prominent, and the rest are basically green, and even the cars that have been popular in recent years are only overweight by 0.1%. 

From the history of the public offering industry ratio since 2015, more than 10% of the industry, it is difficult to have excess returns for a long time, we have experienced a big bull market in food and beverage and power equipment, because these two industries are from less than 4% of the allocation proportion, the highest rushed to more than 16%. Although electronics has also experienced a rapid increase in the proportion of public allocation, the highest proportion is only more than 12%, as for medicine and biology, the proportion of allocation in most years is more than 10%, itself is already very high, it is difficult to have industry alpha, only the index of the big beta income. 

If you want to outperform the market, you must look for industries with a low proportion of allocation, such as automobiles, machinery and equipment, and basic chemicals, which have a large number of listed companies but have a very low proportion. 

04 Key stocks allocated by public offerings

The public offering focuses on the allocation of individual stocks, which is the result of the beauty pageant of fund managers, who may not meet your taste, but reflects the aesthetics of the majority of people in this market. 

The above table is the top 20 public offering holdings in each quarter since the beginning of the year. In the eyes of institutional investors, it is obvious that only by drinking alcohol and taking medicine can it last for a long time. Among the top five holdings, the unchanged is Mao Wulu. 

If we compare the 2015 public offering quarterly holdings with the current one, it is really upside down. At that time, the key positions of the public offering were mainly big finance and computers, and most of the companies in these key positions have stepped down from the altar today. We also have reason to believe that in another 10 years, there will still be subversive changes in the top 20 public offerings. 

Nothing is eternal, the only constant is change itself.

Generally speaking, the higher the free float market value of a listed company, the more public positions it holds, so we use a simple linear regression to fit the quarterly data from 2015 to the present, and the results are as follows: 

From 2015 to the present, there are a total of 35 quarters of data, and we have obtained 35 linear regression equations, and from the data of R2, they are basically above 0.6, indicating that the explanatory power of the regression equation is sufficient. From the perspective of the coefficient of free float market capitalization, it is also showing a trend of increasing year by year, and the recent full-caliber interim and annual report data are between 0.15-0.2. The significance of this value is that for every 10 billion increase in the free float market value of listed companies, the public offering allocation will increase by 1.5-2 billion yuan. 

In the past, when we looked at the quarterly positions of the public offering, it was very important to see which stocks were overweight or underweighted by the public offering, and to judge which ones were white moonshine and which ones had become mosquito blood. This often requires us to pull a graph on Excel and find it little by little, but there are already relatively mature algorithms in statistics, this kind of high-allocation and low-allocation stocks are statistically called extreme values, also called outliers, as long as we find out the stocks with standardized residuals greater than or less than 4 times the standard deviation. 

The above table is the list of listed companies that were overweighted by public offerings in the third quarter. The favorite of the public offering is Luzhou Laojiao, with a free float market value of 155.4 billion, and the public offering has a full 62.9 billion, as well as CATL, with a free float market value of nearly 500 billion, of which 100 billion is publicly offered. 

After talking about the public offering of Bai Yueguang, there is naturally mosquito blood, and the following are low-level public offerings. 

If you're looking for a reversal, these companies are the right alternatives. For example, BOE, with a free float market value of more than 100 billion yuan, has a public offering position of only 2.1 billion, and LONGi Green Energy is slightly better, with a free float market value of 160 billion yuan, a public offering position of 12.5 billion yuan, and Yili shares, the food and beverage leader, have actually reached the low point of allocation. 

In fact, most of the researchers are circled industries, and there are more rules and regulations, but some companies, no matter which industries you are assigned to, need to have an understanding, and there is also an indicator in the linear regression to measure the importance of individual stocks, which is the Cook distance, also translated as the Kirk distance (Cook distance), which reflects the strong influence points in the linear regression, that is, those listed companies with high importance, like the systemic importance list of the banking industry. 

The above figure is the top 30 of the more than 100 listed companies that we picked out in the Cook distance greater than the critical value (4/(n-p-1)), including both those with more public offering positions, as well as those with large market capitalization but few positions, in short, they are all companies that have a great impact on A-shares. You can not invest, but the impact of these companies' own movements on the entire A-share market is difficult to ignore. 

05 The law of copying homework

Copying homework is a technical job. Many of us will make mistakes when listening to the teacher's dictation when we are studying, not to mention copying the fund manager's homework when placing an order. 

In terms of style, the public offering must be a value style, because large and medium-sized public offerings, companies with a market value of less than 5 billion may be difficult to enter the stock pool, and the stocks that are not included in the stock pool are not even eligible to be flipped off. 

Before copying homework, the first thing we need to judge is whether the market is a value style. If not, it's a copy of loneliness. 

Judging the market style in A-shares is a lip to mouth job, but the difficulty is at least not easier than winning the National Football World Cup. If you can handle it, don't mention the public offering, and the social security fund will not ask you to be the chief investment officer, they will be regarded as having eyes and not knowing Mount Tai. 

In addition, there is the question of absolute and relative returns. As an investor, you want absolute returns, but public offerings are relative returns. If the market falls by 20%, but the public offering only falls by 19.9%, then the public offering is excellent, but you want to make money. 

Stock speculation does not decide to ask quantitative. We did a backtest with Jukuan's platform, and the code was cloned from "Pillar Turning the Sky", taking the top 10 public positions in the public offering every quarter, and got the following results. 

From 2015 to the present (2023.11.24), the overall rate of return is 74.61%, an annualized rate of 6.65%, nearly 9 years, this rate of return can not be said to be high, but at least there is no loss, let's look at the situation every year. 

The performance of public heavy stocks fluctuates greatly from year to year. Either it is very good, such as 2017, 2019, 2020 in the three years, the annual yield is close to 60%. Either there are significant losses, such as in 2018, 2021 and 2022, with a yield of around -20%. Of course, if you can close it at the end of 2020, the yield of this portfolio will be close to 300%. 

Let's pull out the Sharpe index commonly used in analytical funds, and since 2021, the Sharpe index has been below the 0 line, which means that the return on portfolio contribution has been negative for a period of time. 

This year's performance has also been mediocre, with losses of more than 10% as of November 24. If 2023 ends with this yield, will 2024 be good? 

In Mandelbrot's book "The (Wrong) Behavior of the Market", the Noah effect and the Joseph effect of the stock market are mentioned, and the simple summary is that the stock market may maintain a certain state for longer than you expect. As John Maynard Keynes said, "The market remains irrational longer than you remain bankrupt." ” 

You see that we have lived in vain for so long, and we have no conclusions. Actually, otherwise, we have at least come to a conclusion that the public offering in 2024 will not necessarily make you money. 

Each of us has time to review our journey in A-shares. If you have ever become rich and have kept the results of getting rich, then you must not listen to other people's stock trading experience, you don't need to change anything, just keep the original state. But if you keep losing money, it means that most of your thinking in A-shares is wrong. There is a factor kanban board in the poly width, and below it is the factor with the highest loss rate. 

Using the data of the past 10 years to backtest, the highest loss rate looks like technical analysis at a glance. The 26-day, 20-day, 60-day, 12-day, and 10-day moving averages, BBI momentum, and further down and the Bollinger Bands are all commonly used line indicators. The indicator with the biggest loss is the 26-day exponential moving average, which loses 30% per year and 95% over 10 years. So which metrics will make money in the long run? 

It's basically two, a small market capitalization and a low turnover rate. A small market cap is fine, and a low turnover rate is a bit contrary to common sense. In the impression of many people, the turnover rate of the land volume represents that there is not much opportunity, and the premise of the start of the market must be large. But the probabilities of the past 10 years tell you that buying with a low turnover rate and selling at a high turnover rate is the wealth password, not the other way around. 

Finally, although I don't think that because the market has not performed well in the past three years, the probability of the market being good in 2024 is greater, but overall the bull market may not be far away. 

The chart above shows the annual rise and fall of the Dow Jones in the last 120 years. Red represents up, green means down, and yellow means up or down within 1%. The most striking feature of this chart is that in the last 100 years of the last century, every 5 years at the end of the year have all risen. But alas, in the 21st century, this law has become ineffective. 

What has happened in the past 20 years of the 21st century? We think a more reasonable explanation is that the trend of US stocks has begun to be out of touch with the cycle of economic fundamentals. Although it is difficult for us to say that it is right to rise every five years, the entire 100 years of the 20th century are the result of this, and there is naturally his reasonable logic behind it. 

The fact is that since 2000, the U.S. economy has begun to transform to the Internet of information technology. The core stocks of the Dow Jones index have changed from the original big consumption to Microsoft and Intel and other information technology companies. Recent information also suggests that the short positions of the tech giants Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta Platforms and Tesla, which account for nearly half of the total market capitalization of the United States, have fallen to about 1% of the total market capitalization. 

U.S. stocks have not been rising all the time, at least in the 70s of the last century and the first decade of this century, there were long-term sideways transactions. Also in the East, there is another big country whose stock market has been rising recently, and that is India. Both countries have one thing in common, and that is a long-term trade deficit in goods. 

Our CSI 300 index has less than 16% information technology, so our stock market may be more like the US stock market of the last century than the current one. 

Then it is possible to build a bottom and flip more in 2024, and the chicken dog will ascend to heaven in 2025. (Author: Foolish Old Man)

This article is based on publicly available information and is for information purposes only and does not constitute any investment advice. The author is a foolish old man, and he has a column of the same name in Snowball.