Although QDII funds are of great significance for investors to allocate global assets and achieve risk diversification, most public funds still have a relatively conservative attitude towards overseas investments.

Since 2021, the performance of QDII funds has started to lead the market. This type of fund, which covers overseas stocks, bonds, commodities, REITs, and other asset types, is attracting more and more investors seeking diversified allocation due to its high divergence from the A-share market trend.

"In the past, due to the high-speed growth of China's economy, it was possible to achieve high asset returns without a global layout. However, China is currently in a low-interest-rate cycle, with economic growth slowing down and domestic asset returns declining, leading to a significant increase in the demand for overseas asset allocation," a recent report by Peking University HSBC Business School's think tank said, which surveyed the global layout of public funds.

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QDII funds saw rapid growth in 2023. According to the data in the report, the number of QDII funds increased by 26.58% year-on-year, and the scale increased by 27.60% year-on-year. By the end of 2023, there were 281 QDII funds in China's public fund market, with a total scale of approximately 416.982 billion yuan, of which 78.15% were passive index-tracking QDII funds.

In terms of investment direction, QDII funds are mainly invested in the Hong Kong and U.S. markets, with a small portion invested in emerging markets such as Vietnam and India. Overall, assets of Chinese-funded enterprises account for a high proportion in the holdings of QDII funds. By the end of 2023, among passive QDII funds, the proportion of indices related to Chinese concept stocks was 23.16%; in the stock holdings of active QDII funds, the proportion of Chinese concept stocks was 58.03%; and in the bond investments of QDII funds, the proportion of overseas bonds of Chinese-funded enterprises was 18.36%. In addition, most of the Hong Kong stocks invested by QDII funds still have their office addresses on the Chinese mainland, and their main business is also concentrated in the Chinese mainland, with their operational cycles closely related to the domestic economic and financial environment, making it difficult to achieve risk diversification.

QDII funds are of great significance for domestic investors to diversify globally, but Wu Jiaxuan, a senior research officer at Peking University HSBC Business School's think tank, found in the survey that most fund companies still have a conservative attitude towards diversified investments abroad. The main reason is that investing in foreign assets requires higher research and human resource costs, but the scale is difficult to expand.

"Most public funds still have a relatively conservative attitude towards overseas investments. In order not to fall into a deficit, in fact, most fund companies will not invest in the development if they estimate that issuing QDII funds is not cost-effective before product issuance," Wu Jiaxuan told Caijing.Cost Constraints and Risk Factors to Consider

As of the first half of 2024, the QDII fund category has been leading the market for three and a half years consecutively.

From 2021 to 2022, the performance of domestic actively managed equity funds declined, while QDII commodity funds represented by the GFD Dow Jones U.S. Oil Fund led the market for two consecutive years, with a return as high as 166%. In 2023, actively managed equity funds primarily invested in A-shares and Hong Kong stocks performed overall sluggishly, while index funds tracking the Nasdaq achieved an average return of 55%. By the halfway point of 2024, A-shares were still defending the 3,000-point mark, while overseas market technology stocks continued to rise, driving the returns of Jing Shun Great Wall Nasdaq Technology Market Value Weighted ETF and Jianxin Emerging Markets Select to exceed 30%. In addition, the performance of market indices in Japan, Vietnam, India, and other markets that public funds have started to lay out in recent years has also been better than that of A-shares.

However, the pace of public funds going global still falls short of expectations. Research by Peking University HSBC Business School's think tank shows that the biggest obstacle is cost, with high information acquisition costs remaining the most important factor hindering the global layout of public funds.

On one hand, there are research and investment costs. The questionnaire results from Peking University HSBC Business School's think tank indicate that high research and investment costs and information asymmetry are the most important factors preventing public funds from achieving a global layout. This includes high research costs caused by factors such as time differences, distance, and entry-exit restrictions, information asymmetry caused by cultural and language differences, and high research and investment costs caused by differences in trading mechanisms and market pricing mechanisms.

On the other hand, there are talent costs. The report cites domestic scholars' research findings that fund managers' overseas background and understanding of the fundamentals of overseas companies are important sources of their information advantage in offshore markets, and funds with a higher concentration in offshore markets perform significantly better. However, due to the high cost of introducing international talent, the current salary packages of domestic fund companies are not attractive enough to those with overseas research and investment capabilities who have studied or worked abroad, thus making international talent relatively scarce and the international research and investment capabilities of domestic fund companies very limited.

The report mentions that fund managers tend to invest in markets where they have worked or become citizens. Since Chinese fund managers' overseas work areas are relatively limited to Hong Kong and the United States, QDII funds are also more invested in these markets.

The composition of the talent team directly affects the global investment quality of QDII. Although the vision of QDII funds is to lay out globally, the actual situation is more invested in Hong Kong and U.S. stocks and bonds of Chinese-funded enterprises.

"Academic research shows that home bias can lead to a decline in portfolio return levels, low portfolio efficiency, and increased financial risks. Since many QDII funds are invested in Chinese-funded enterprises, the level of diversification is not high, and the returns of many QDII funds last year were not optimistic, making it difficult to catch up with the global average," said Wu Jiaxuan.

The high cost of overseas accountability is also one of the obstacles. If the overseas companies invested by the funds have financial fraud and other issues, the cost, difficulty, and duration of fighting transnational lawsuits are high. Transnational litigation requires the hiring of lawyers from both domestic and foreign parties, and the cost of paying lawyers alone is a significant expense.The research findings from Peking University HSBC Business School's think tank indicate that fund managers who invest in markets other than Hong Kong, China, and those who invest in stocks place greater emphasis on the high costs associated with accountability. "Should there be a situation requiring accountability for Chinese concept stocks, due to their corporate headquarters being within the territory, the advancement of related litigation would be easier, less costly, and shorter in duration."

However, to Wu Jiaxuan's surprise, despite the interviewees mentioning the high costs of accountability abroad and often emphasizing the importance of regulatory factors in investment decisions, the survey results did not rank high accountability costs and ensuring regulatory compliance among the most critical factors.

Additionally, geopolitical factors and exchange rate fluctuations are risks that fund managers must consider. Exchange rate fluctuations could lead to a decrease in investment returns; if the currency of the country in which the investment is made depreciates, the return in local currency will be reduced, leading to capital loss. Bond-type QDII products need to consider hedging exchange rates because the return level of bonds is inherently not high, and if exchange rate fluctuations occur, in extreme market conditions, it is possible to lose all the returns for a year. Exchange rate risk management also leads to increased fund management costs, as fund companies need to invest in researching exchange rate fluctuations and use hedging tools to mitigate risks.

How to optimize incentive mechanisms under quota bottlenecks?

"Quota is currently the biggest bottleneck for our QDII funds," said a person from a leading public fund when mentioning the company's QDII layout to Caijing.

In recent years, the proportion of used QDII quotas has been increasing year by year, and quota shortages have repeatedly led to restrictions on QDII fund purchases. Wind (Wangde) data shows that as of June 28, out of 629 QDII funds, 342 were under restricted purchase or in a "directly closed to new customers" state, accounting for 54%. In addition, some products have very "mini" purchase limits, with daily subscription limits as low as 10 yuan. In the secondary market, product restrictions have also led to multiple rounds of speculation and premium risks.

The quota limits the size of the fund and also restricts the management returns of QDII funds. A research report from Peking University HSBC Business School's think tank believes that lower management fee income is difficult to support higher research and investment costs, making it hard for fund managers to invest in developing products that diversify risks globally.

Statistics show that as of the end of 2023, the average QDII quota for each securities institution was $1.207 billion, with only three institutions having quotas above $5 billion, while as many as 30 institutions had quotas below $500 million. Many institutions with quotas below $500 million, despite being approved to operate QDII funds, cannot truly engage in foreign investment business due to the small approved quotas.

Behavioral factors also affect the development of QDII funds. Customer behavioral tendencies lead to a preference for domestic public funds, and the principal-agent problem of fund companies also leads to insufficient motivation for fund managers to diversify risks globally.

The report believes that the income of fund managers is closely related to the size of the fund and has a smaller relationship with the ability to diversify risks, so fund managers often lack the motivation to make global layouts to diversify risks for investors. At the same time, managing funds that invest in foreign assets will involve more issues, but the management fee ratio of actively managed equity-type QDII funds (an average of 1.4%) is not significantly different from that of actively managed equity-type funds investing domestically (an average of 1.2%).Adapting to customer needs and creating "blockbuster" products is a more "economical" choice for fund companies. Therefore, fund companies are reluctant to invest effort in investor education and global layout for the long-term returns of investors.

"The setting of management fees needs to be considered in conjunction with scale and research and investment costs. Due to the existence of scale restrictions on QDII funds, a higher proportion of management fees is required to face higher research and investment costs. However, an excessively high proportion of management fees will affect product sales, and blindly increasing management fees is also not feasible." Wu Jiaxuan analyzed that this is also one of the reasons why most fund companies are not enthusiastic about global layout.

Faced with the challenges of global layout of QDII funds, the report also gives suggestions, including optimizing the incentive mechanism of fund managers.

Peking University HSBC Business School believes that current fund managers often pursue short-term returns too much and neglect long-term layout considerations. This short-sighted behavior is not conducive to the steady development of funds and cannot bring continuous and stable returns to investors. Therefore, in the incentive mechanism of fund companies, more consideration should be given to long-term performance, encouraging fund managers to pay attention to long-term returns and continuously create returns for investors.

Under the existing fund company governance system, fund managers are more inclined to serve the shareholders of the management company rather than the fund investors. When making decisions, fund managers may consider the interests of the company's shareholders more, rather than the interests of investors. In order to change this situation, the long-term risk-return ability of the manager should be more reflected in the interest distribution mechanism, making the interests of the fund manager more consistent with the interests of investors.