Billion Yuan Fund's $19 Billion Drop

In 2024, the Chinese public mutual fund industry is experiencing a robust growth trend, with the total assets under management increasing significantly by approximately 5.23 trillion yuan, reaching a total of 32.83 trillion yuan by the end of the yearThis optimistic growth is noteworthy in a financial landscape that often grapples with fluctuations and uncertaintiesHowever, amidst this overall growth, there are contrasting narratives of decline, particularly within some large-scale fund houses that are witnessing decreases in their management sizes.

One such example is Xingyin Asset Management, which has faced substantial challenges in 2024, with its total management scale decreasing by 18.96 billion yuan, making it the largest loser among those managing over 100 billion yuan in assetsThis raises pertinent questions about what has gone awry within the company that would lead it to be an exception in a year marked by overall growth for the sector.

The decline in asset management at Xingyin can be attributed to several internal and external factorsAt the end of 2024, the firm managed a total of 106.28 billion yuanIt is noteworthy that more than 90% of this management was attributed to fixed-income products, while equity-type funds, including stock and mixed funds, made up less than 10%. This clearly highlights a strategic tilt toward debt instruments at the expense of equities, suggesting a lack of confidence or expertise in handling stock investments.

Breaking this down further, the company’s money market fund saw an alarming drop, with its scale down to 45.82 billion yuan, a dramatic decrease of 15.56 billion yuan year-on-year

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This fall played a significant role in the overall shrinkage of the company’s assetsOther categories, such as mixed and bond funds, also faced declines, finishing the year with scales of 1.40 billion yuan and 58.015 billion yuan, down by 1.19 billion yuan and 2.345 billion yuan, respectively.

Typically, money market funds are among the safer investment vehicles as they primarily invest in government bonds and deposits that offer stable returnsConsequently, a drop of over 25% in a single year is rare and alarmingThe question arises: why has Xingyin managed to record such a drastic scaling back of its assets?

In May 2023, Wu Ruoman took over as chairwoman and promptly set an ambitious target for the firm’s money market fund, aiming for a management scale of 50 billion yuanUnder her leadership, the fund’s scale saw a rapid increase from 25.785 billion yuan in the third quarter of 2023 to 61.38 billion yuan by year-endThis surge was largely attributed to the strong market performance of several of their money market funds.

A standout in the lineup was Xingyin Cash Addition A, which achieved a remarkable annual return of 2.51% in 2023, a substantial increase of 0.93% compared to the previous year, outpacing the median return of 1.91% among its peersIts overall ranking jumped from 603 out of 690 to first out of 766.

The substantial increase both in scale and returns for money market funds drew attention from investors and the mediaHowever, this rapidly growing performance was soon shrouded in controversy when reports emerged linking the fund's success to its management engaging in reverse repos involving lower-rated AA bonds, which are generally prohibited by regulatory guidelines.

Although Xingyin attempted to refute these allegations publicly, data indicated that Xingyin Cash Addition A indeed held bonds rated below AAA at the end of 2023, which raised further eyebrows and concerns regarding compliance and ethical practices.

In the aftermath of significant regulatory penalties, the company faced swift upheaval in its leadership structure

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By July 2024, general manager Zhao Jianxing had left the firm, and deputy general manager Hong Mumei resigned from four money market funds, including Xingyin Cash Addition A.

2024 saw several money market funds, including Xingyin Cash Addition A, experience declines in return rates and rankings, consequently leading to a massive shrinkage in their overall scale.

The troubles at Xingyin were not limited to just the money market funds, as their equity product lines also suffered due to poor performanceBad investment choices from key fund managers further exacerbated the declining fortunes of these equity products, leading to increasing skepticism among investors.

A focal point for criticism was Kong Xiaoyu, a veteran manager within the company, who had helmed several funds, including Xingyin Prosperity A, Xingyin Pioneer Growth A, and Xingyin Research Selection ADespite being with the company for over six years, his management yielded a return of -5.83% over the previous two years and -13.58% over three years.

The evidence of poor performance affected his ability to attract and maintain investment, with his managed fund sizes declining from 3.63 billion yuan in Q1 2020 to a mere 0.4 billion yuan by Q4 2022, and finishing in Q4 2024 at just 0.11 billion yuan.

In 2024, an investment decision involving a heavy position in an underperforming stock was seen as particularly egregiousDuring Q1, Kong's four funds collectively ranked Pulley Pharmaceuticals among their top five holdings, accounting for over 4% of each fund's portfolio, amounting to a total of 434,900 shares.

Pulley Pharmaceuticals was grappling with serious financial difficulties and recorded over a 70% decline in net profit in 2023, reflecting a continuous downward trend in sales and profitability

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Despite the troubling fundamentals, Kong chose to make a significant investment, soon becoming a target of investor scrutiny.

On April 16, 2024, Pulley Pharmaceuticals faced a major investigative setback when the Hainan Securities Regulatory Bureau found inaccuracies in the company’s revenues and profits from previous years, leading to a self-examination of their financial statements due to reported severe financial fraud.

By Q2 2024, following the scandals, Kong Xiaoyu had to divest from Pulley Pharmaceuticals and exited from their top ten holdings, incurring significant losses in the process.

Further compounding the difficulties for Xingyin, another equity fund manager within the company, Yuan Zuodong, holds multiple positions, including the head of the equity investment department, managing eight funds with a total fund scale of 9.73 billion yuanHowever, the mixed equity funds performed poorly, with the interest-sensitive Xingyin Smart Consumer Mixed A yielding only a 7.34% return over the past year and ranking 3330 out of 4150.

Yuan's strategy has often been characterized by high-frequency trading, where stocks were often sold shortly after acquisition, leading to losses with estimates suggesting double-digit declines in several holdings.

Notably, his focus has been on acquiring what he deems "cost-effective assets" while asserting a strategy to position during economic cyclesHowever, throughout the volatility of 2022-2024, his assessments fell short on various cyclical stocks, including coal and air travel, leaving him unable to manage timely adjustments to holdings, eventually resulting in disappointing returns.

Ultimately, Xingyin has missed out on potential benefits during a period when equity funds expanded significantly

Even with a growing market for active funds, Xingyin has struggled with an equity scale of just over 2 billion yuan, resulting in a weak position in the industry.

Another challenge for Xingyin is its failure to leverage the rise of index-tracking funds (ETFs), which have gained substantial traction in the past two years, outpacing actively managed fundsMajor fund houses are increasingly employing strategies that bolster their ETF offerings; however, Xingyin trails behind in this respect, only managing about 250 million yuan in ETFs.

The rapid decrease in management scale and the poor performance of equity funds at Xingyin is directly connected to a deeper-rooted issue within the firm: instability in its management teamFor instance, over recent years, Xingyin underwent four leadership changes in four years, creating a woefully inconsistent strategy.

In March 2021, the previous CEO, Zhang Li, departed, followed by Zhang Guiyun stepping in but leaving in less than six monthsSubsequently, Zhao Jianxing assumed leadership, only to leave again in July 2024. Following this tumult, chairwoman Wu Ruoman briefly took on the role of acting CEO.

As of January 18, 2025, Yi Yong has been designated as the new leader of Xingyin after a prolonged vacancyWith a background in brokerage and investment research, Yi's credentials suggest potential for strategic guidance; however, the pressing question remains whether he can steer Xingyin out of its current turbulence.

Compounding these issues, the erosion of management stability extends to middle management as well

For example, in April 2024, former compliance head Zheng Ruijian stepped down for health reasons, leading to a quick succession of leaders, mirroring the larger instability at the topBy December of the same year, another vice president, Shen Yang, left due to personal reasons, alongside other key personnel exits.

This turmoil within the team has raised unsettling concerns regarding compliance frameworks, investment research capabilities, and internal control mechanisms at Xingyin, leading to questions about the overall integrity and direction of the firm.

Indeed, in April 2024, the firm and its senior management received warnings from the Shanghai Securities Regulatory Bureau and faced public backlash following allegations of reckless behavior and a lack of proper internal proceduresA critical article highlighting the plight of investors described the situation as one where large-scale funds were essentially abusing their investors.

Add to this the social media revelations of twelve major issues within Xingyin, such as chaotic employee management, heavy exposure to underperforming stocks, blind expansion amid poor performance, complex internal relationships, questionable personal conduct among fund managers, misleading promotional strategies, confusion between public mutual funds and private accounts, and a lack of professionalism in work attitudes.

Fundamentally, these issues resonate with the warnings highlighted in the regulatory notices and suggest considerable shortcomings in the firm's compliance infrastructure and internal governance.

Additionally, there are concerns regarding the level of investment competency within the firm, as evident from the brief tenures of many of the fund managers

Current statistics show that among the 19 fund managers at Xingyin, seven have been in their roles for less than three years, comprising over 36% of the total, with only seven managing for over five years, indicating a concerning level of instability.

The average tenure of a Xingyin fund manager currently sits at only 3.97 years, which falls below the industry average of 4.69 yearsSuch frequent leadership changes pose challenges for developing and refining investment strategies that rely heavily on stable and experienced management.

Without stable and highly capable research and investment teams, it becomes increasingly difficult to maintain strong returns on equity fundsFailed returns, in turn, hinder the expansion of actively managed funds, compounding the firm's challenges.

Historically, equity funds have commanded higher management fees compared to bond and money market funds, which has allowed firms with strong equity performance to thriveHowever, in Xingyin's case, while managing sizes grew from around 50 billion yuan in 2017 to over 106.3 billion yuan in 2024, performance metrics have dropped significantly, with net profit falling from 1.95 billion yuan at the end of 2017 to only 53 million yuan in 2024—a staggering decline of over 70%.

In conclusion, the downward trajectory in Xingyin's management scale in 2024 serves as a stark reminder of the critical saying that "if you are not moving forward, you are falling behind." The company now faces crucial challenges in reversing its fortunes, with its ability to navigate these obstacles hinging significantly on the new leadership of Yi Yong and the efficacy of the reforms he implements.

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