Beijing approved 26 floating-rate public funds just 16 days after issuing an action plan to overhaul the sector, signalling how urgently regulators want to tie managers' pay to investors' returns. The China Securities Regulatory Commission says the move will better align fees with performance and discourage steady charges when active managers lag benchmarks.

Regulator moves fast

The China Securities Regulatory Commission approved the first group of floating-rate public funds on Friday, following an action plan it issued 16 days earlier to overhaul the public fund sector. The short gap between the plan and the approvals shows how quickly regulators want to put new rules into practice. The CSRC framed the change as part of a broader push to link fund companies' revenues more closely with the results delivered to investors.

The initial batch comprises 26 funds, all designed to track the performance of large baskets of stocks intended to represent the wider Chinese market. Their returns will be judged mainly against broad-market benchmarks such as the CSI 300, CSI A500, CSI 500 and CSI 800. A number of the new funds will also be allowed to invest in Hong Kong stocks and bonds, giving them cross-border exposure within China’s listed universe.

How the floating fees work

The funding model departs from the long-standing practice in China of charging fixed annual management fees regardless of performance. Under the floating-rate design, management fees rise or fall depending on how a fund performs relative to its benchmark and how long investors hold their shares.

  • If an investor exits a fund within a year, the management fee would be charged at 1.20 per cent.
  • For investors who remain for a year or more, fees depend on performance: if the fund’s annualised return exceeds the benchmark by six percentage points and the holding-period yield is positive, the manager can charge 1.50 per cent.
  • By contrast, if the fund underperforms the benchmark by three percentage points on an annualised basis, the fee falls to 0.60 per cent.

"If we want to charge higher management fees, our funds have to outdo the benchmark rate by six percentage points," said Kang Le, general manager of Invesco Great Wall Fund Management. "That is to say, if the benchmark rate is set at 10 per cent this year, our funds' return rate after the fee charge must reach 16 per cent, so that we can charge higher fees. The condition is relatively high, closely linking investors' interests with actual returns."

Mastheads

Why regulators are changing course

Active equity funds in China have broadly struggled since 2022. Many professional managers failed to beat benchmarks even while firms continued to levy fixed management fees.

That mismatch prompted complaints that investors were bearing the losses while fund companies still collected steady revenue.

The CSRC's action plan said public funds should develop in a "high-quality" way and that incentives should be aligned. The new floating-rate products are the first tangible step. By tying fees to benchmark outperformance, regulators aim to reduce what they see as moral hazard: managers collecting standard fees even when their active bets deliver poorer returns than passive alternatives.

Li Yimei, general manager of China Asset Management, welcomed the change. "We really hope that we can create a better long-term investment experience for our investors under the innovative mode," she said. Her comment underlines how some major asset managers see the reforms as an opportunity to rebuild trust with retail and institutional clients.

Potential market effects and investor choices

The fee structure will change incentives for fund houses. Investors should note that fees will now vary with performance and holding period, so choices between active products and passive alternatives will need to account for variable charges as well as expected returns.

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The approvals are the first tangible step in the CSRC's recently issued action plan to overhaul the public fund sector. By tying fees to benchmark outperformance, regulators aim to reduce moral hazard — and rebuild investor trust — as further steps under the plan are implemented.

This article was created with AI assistance.