In the era of "over 10,000" fund products, liquidation seems to have become commonplace. However, many hidden details have brought fresh explanations to the market, triggered many thinking, and continued to promote the supply and demand of the fund market.
Judging from the data of the past ten years (2014 to 2023), the liquidation of funds has accelerated in the past five years (2019 to 2023). According to Wind data, as of December 26 this year, the number of funds liquidated since 2023 has reached 256, a new high in the past five years. Not only that, the number of equity funds liquidated in 2023 has also hit a record high since the beginning of the mutual fund industry in 1998. In addition, the number of FOF liquidations in 2023 exceeded double digits, soaring to three times that of 2022, and the number of ETF liquidations also increased rapidly.
Based on the analysis of the 10-year dimension data, the phenomenon of fund liquidation also reveals certain "regular characteristics" that few people have discovered. For example, 85% of liquidated funds do not survive to the fifth year, which has become a "five-year curse" for fund liquidation. For another example, fund liquidation is not only related to scale and performance pressure, but also related to excessive fund rates, making high-rate funds the hardest hit by liquidation. In addition, from the perspective of the development trend of fund products, the phenomenon of liquidation has intensified in recent years, which is actually the "liquidation tide after the decline of thematic investment" in the fund industry.
The above phenomenon and analysis have not only become the latest footnote to the "normalization of fund liquidation", but also lead to a classic question: under the normalization of liquidation, how should the people make decisions?
The number of liquidated funds in 2023 hit a five-year high
According to Wind data, fund liquidation has become a common industry phenomenon from a few individual cases, and complete statistics are available, starting in 2014. The number of funds liquidated that year was 11, and then increased year by year, quickly surpassing 100 in 2017. After 2017, the number of liquidated funds remained in the triple digits and soared to 430 in 2018, a record high. In 2019 and 2020, the mutual fund industry entered a new round of vigorous development, and the number of fund liquidations dropped to less than 200. But from 2021 onwards, the number of liquidated funds has risen again, reaching 254 in 2021 and 235 in 2022. According to Wind, as of December 26, the number of liquidations in 2023 reached 256, a record high in the past five years, second only to 2018.
(List of fund liquidations in the past 10 years; source: Wind, as of 26 December)
In view of the liquidation of funds in the past decade, Morningstar recently released a special research report. The research report pointed out that the number of liquidated funds in 2018 reached an all-time high, which was caused by multiple factors. On the one hand, the new regulations on asset management issued in April 2018 require financial institutions not to promise to guarantee principal and returns when carrying out asset management business, and public fund products are not allowed to be classified by shares, which has led to the gradual withdrawal of capital guaranteed funds and graded funds. On the other hand, in the context of strict supervision, deleveraging and de-nesting of banks' outsourced funds, the sharp ebb of outsourced funds has led to the acceleration of product liquidation. In addition, the strict restrictions imposed by the regulators on "mini funds" and the general environment of the stock market decline in 2018 have led to the liquidation of many "mini funds" by fund companies due to cost and performance pressures.
Morningstar's statistics on the number of fund liquidations in each calendar year and the ratio of liquidated funds to new funds over the past decade found that both indicators have shown an upward trend in the past five years (2019 to 2023). Taking 2023 as an example, the Chinese reporter of the brokerage found that in addition to maintaining a high total amount, the liquidation fund also presents three new structural characteristics:
First, the liquidation of equity funds hit a record high. As of December 26, a total of 61 equity funds have been liquidated so far in 2023, up from 58 in 2022 and 40 in 2020. Even in 2018, the year of liquidation, only 31 equity funds were liquidated.
Second, the number of FOF fund liquidations exceeded double digits, reaching 12. Specifically, the liquidation of FOF products first appeared in 2022, but only 4 products were liquidated that year, and the number of liquidations in 2023 soared to three times that of 2022. Among the 12 liquidated FOFs, 7 are pension FOF products.
Third, the number of ETF liquidations has increased rapidly. According to Wind, even in 2018, only 13 ETFs were liquidated, and in 2019 and 2020, the number of ETFs liquidated was only 5 and 13, but the number of liquidations in 2021 and 2023 has risen sharply, reaching 25, 34 and 32 respectively.
Eighty-five per cent of liquidated funds did not survive to the fifth year
One of the reasons for the rapid increase in the number of fund liquidations after 2019 is that the fund industry has accelerated the issuance of new funds at market highs in recent years. However, after the issuance, the track market fell back, and the holders chose to redeem after encountering losses. The performance pressure and the shrinkage of the scale and share made the new fund reduced to a mini fund and eventually went into liquidation.
Morningstar captured this trend in a research report, calling it the "five-year curse" of the fund's survival. Morningstar's statistics on the lifetime of all liquidated funds in history found that most funds closed early in their lives, and about 85% of the funds in these samples did not even survive to their fifth year. Taking the liquidation of funds in the first 11 months of 2023 as an example, 181 funds "died" less than a year after they were established. Morningstar believes that part of the reason is that the overall market is relatively sluggish, which leads to the dual pressure of redemption and net value decline of fund products, and eventually many products are liquidated.
(Source: Morningstar Direct, as of November 30, 2023)
Explanations, size and performance of fund liquidations are well-known causes, but there are not many comprehensive quantitative analyses. Morningstar compared the average asset size of the four quarters before the liquidation of the fund with the average size of all funds in the market that year, and found that in the past five years, the average size of the fund before liquidation hovered around 100 million yuan, and if the product was less than 50 million yuan for 60 consecutive working days in the process of struggling to survive, it would be liquidated and eliminated from the market.
Morningstar Research Report pointed out that due to the law of economies of scale, the probability of liquidation of small-scale funds is greater than that of large-scale funds, mainly because the management fee income generated by smaller funds is not enough to support the operating costs of the portfolio. Specifically, compared with a fund with a scale of 100 million yuan and 1 billion yuan, the operating costs may be almost the same, but the profit is not on the same level. In particular, the management fee income of the "mini-fund" is very limited and cannot cover operating costs such as investment researchers, back-office liquidation, and information disclosure. If it is necessary to expand the scale of the fund through continuous marketing in the later stage, the marketing cost is also a large expense, and it may not be able to achieve good results.
When the market is not profitable, the risk of products with poor performance becoming "mini funds" is further increased. "Fund companies should pay more attention to improving the performance of existing products, combine their own investment and research capabilities and focus on customer needs to provide investors with truly competitive products with long-term performance." Morningstar Research reported.
High-fee funds are the hardest hit by liquidations
In addition to superficial reasons such as poor performance, fund liquidation is also associated with excessively high fund rates. Morningstar's statistics show that high-fee funds are the hardest hit by liquidation. As the rate increases, so does the likelihood of the fund being liquidated.
Specifically, Morningstar Research Report uses arithmetic average rates (Morningstar's net rate represents the proportion of annual fund management fees, custody fees, sales service fees and other operating expenses to the fund's annual average net assets) to study the fees of public funds to reflect the actual pricing level of fund companies.
Morningstar ranks equity funds and bond funds in descending order of rate, and divides them into five equal parts. The results found that over the past decade, the highest rate of equity funds and bond funds had liquidated 17% and 32%, respectively, almost double and four times that of the cheapest fee group. In equity and bond funds, investors have chosen cheaper products, and the probability of liquidation and closure of more expensive fund shares has increased significantly.
(Source: Morningstar Direct, as of December 31, 2022)
In addition, fund liquidation can also reflect the overall development trend of the fund industry. After sorting out the types of liquidated funds in recent years, Morningstar pointed out that this is "a wave of liquidation after the decline of industry-themed investment". To some extent, this provides an explanation for the new characteristics of liquidation funds observed by the above-mentioned brokerage Chinese reporters.
"In recent years, investment opportunities in emerging industries have emerged (such as new energy, artificial intelligence, etc.), the market structure is obvious, and the investment in thematic tracks is hot, and the relevant industry indices have risen attractively. While the excess returns of active funds are declining, industry-themed funds are sought after by investors, which has boosted the rapid development of industry-themed ETFs from the demand side. On the supply side, due to the serious homogeneity of broad-based index products in the market and the increasingly fierce competition, fund companies have targeted subdivided industries or thematic tracks to seize opportunities. On the one hand, there is the explosive growth of ETF funds, and on the other hand, the scale of some ETFs is difficult to grow, and they are gradually reduced to 'mini funds' and are on the verge of liquidation. Morningstar Research reported.
Morningstar observed that the number of passive fund product liquidations has climbed in the past five years, taking 2023 as an example, more than half of the 57 passive funds liquidated as of the end of November this year are ETF products. "The domestic ETF market is still in a period of rapid development, and seizing market share through new funds is still a priority. With the maturity of the development of the industry, the stability of the competitive landscape, and the ebb of track theme investment, a considerable number of ETF products will inevitably be liquidated after the fierce market competition, which is also an indispensable part of the healthy development of the market. On the other hand, although there is more room for domestic actively managed funds to obtain excess returns, since 2019, the excess returns of active equity funds have begun to decline, and the development model of performance-driven active management has encountered challenges. ”
(Source: Morningstar Direct, as of November 30, 2023)
Choose a fund that is relatively large, but not bigger
The study of fund liquidation should ultimately be based on investment choices. For example, in recent years, the industry has been discussing the following questions: will fund liquidation become the norm, and how should fund investors make decisions?
Morningstar pointed out that since November 2017, when the regulator attached importance to and strengthened the management of "mini funds", public fund products have ushered in a "supply side" reform. With the rate reform since July 2023, fund liquidation will gradually become normalized. For fund companies, the liquidation of "mini funds" can better focus on products that are in line with their own investment and research capabilities, reduce the operating costs of the fund, and improve operational efficiency.
From the perspective of industry development, Morningstar said that taking the US market as an example, it is not uncommon for long-term underperforming funds to lead to "miniaturization" and liquidation. For example, from 2005 to 2020, the ratio of the number of closed funds to the number of new funds issued in the U.S. market gradually increased from 0.5 to 1.5, indicating to a certain extent that the rate of fund elimination is significantly higher than the rate of new fund issuance. About 40% of all funds liquidated during the period could not escape the "five-year duration curse" mentioned above, and the probability of liquidation of underperforming funds was higher. On the whole, the natural survival of the fittest in the industry has maintained the ecological health of the fund industry to a certain extent.
However, Morningstar said that there are currently more than 10,000 fund products in the industry, and products with a high degree of homogeneity far exceed investor demand. Funds that are too small will also increase the amortized operating costs of the product. Although there is a certain risk of loss in the liquidation of the fund, investors can withdraw as soon as possible and choose new products.
If you want to avoid the liquidation of the fund, Morningstar recommends that investors try to choose a relatively large fund and always pay attention to the dynamic changes in the size of the fund. However, the larger the fund size, the better, and it is also necessary to comprehensively select the appropriate product based on the risk and return characteristics of the product, the investment management ability and investment method of the fund manager, and the risk appetite and financial objectives of investors.
Editor-in-charge: Wang Lulu
Proofreading: Wang Wei