Welcoming the second quarter: Are fund managers adopting a "defensive stance" or "going all out"?

Source: Shanghai Securities News | Author: Chen Yue

Currently, institutional investors are highly eager to recapture excess returns, but the volatile market environment does not offer the kind of sense of safety we saw at the beginning of 2026.

The growth stories are still being told again and again, but “Heavy Assets Low Obsolescence (HALO)” assets—and the logic behind them—keep hinting at something. Some capital has started looking for a new margin of safety in defensive categories. “Diversification does not create excess returns; it just signals a posture of waiting.” A person in charge of equity investments at a large fund company in Shanghai told a reporter from Shanghai Securities News. “The equity market in the second quarter will most likely send a clear signal, but in the current environment, all we can do is wait.”

“Gain it and lose it” vs. “lose it and regain it”

“Only a little less than two months have passed since the beginning of the year when active equity fund NAVs surged significantly, but subjectively it feels like it was a long time ago.” A top-performing fund manager at a certain mid-sized fund company in Shanghai said.

“Top-performing” means that as of March 30, the fund manager’s product under management still had a cumulative unit NAV growth rate of over 50% in the past year, ranking in the top 20% among all actively managed equity funds in the entire market. And in the past month alone, the product’s drawdown exceeded 10%. Still, he is lucky. Choice data shows that as of March 27, the one-year returns of all active stock funds and stock-leaning hybrid funds across the market have shrunk back to the levels at the start of this year. This also means that the excess returns of most active equity products have been severely eroded recently. “Everyone has gone back to the starting line at the same time.” The fund manager said.

After the beginning-of-the-year “gain it and lose it,” “lose it and regain it” has become the top priority for fund managers in the second quarter. To “win back lost ground,” has the market fallen to the right level? Regarding this, China International Capital Corporation (CICC) believes that the market decline stems from an insufficient pricing of pessimistic scenarios in equity assets. In relatively optimistic scenarios, as long as Middle East geopolitical conflicts do not persist into the second half, causing the oil price’s central tendency to remain above $100, then assets that have priced in too many pessimistic expectations—such as U.S. Treasuries and gold—have a favorable “risk-reward” for going long, and downward pressure on equity assets will also be alleviated. Conversely, if the situation evolves toward more pessimistic scenarios, showing signs of further extension and impact on real economic production, the market may quickly trade in the direction of stagflation or even recession. In that case, the equity market whose risks are generally not priced sufficiently could face even greater pressure.

But in the eyes of institutions, the only assets that can quickly repair NAVs are still equity assets. Recently, Shanghai Securities News, together with 天天基金, conducted a fund company survey (hereinafter “the survey”). Fund managers from multiple well-known fund companies, including 富国基金, 南方基金, and 永赢基金, participated in voting. The survey showed that the equity market remains the investment focus for fund managers in the second quarter. Regarding “which type of investment direction offers more relative return opportunities,” 93.75% of respondents chose growth (highly promising sectors and technology growth-type assets). The share that favored the HALO strategy (such as utilities, infrastructure, core resources, etc.) was 62.5%. For sub-industries, aside from CPO and compute power, fund managers generally remained neutral.

“Hold the defense for a round” and “go all in”

As the market selloff gradually eases, strategic differentiation becomes inevitable. Institutional investors who reallocate to defenses heavily have “their own reasons,” while those who add positions to bet on a rebound also have “their own reasons.” Overall, investors’ optimism at present temporarily outweighs their concerns.

“Downside risk is very limited.” Li Yingzhen, the proposed fund manager for a hybrid fund at 泓德周期臻选, said that in the second quarter the market has the potential to shift from expectation-driven dynamics to a balanced stage of expectation and fundamental verification. Still, it is necessary to closely watch market volatility brought by geopolitical risks and policy changes. A fund manager at a certain mid-sized fund company in Shanghai also believes that from a long-term logic perspective, China’s assets remain highly attractive.

Even if investors are optimistic, some allocation-oriented capital is still very “honest” about moving toward defensive assets. A research report from 华泰证券 shows that from March 23 to March 27, the modeled fund positions exhibited a tendency to rotate toward relatively defensive directions such as consumption and finance, indicating that capital has begun searching for a new margin of safety in defensive names.

“Late April may be a decision point; before then, the portfolio should be as diversified as possible.” A person in charge of equity investments at a large fund company in Shanghai analyzed. “First, we expect the geopolitical situation to become relatively clear by late April. Second, as A-share listed companies finish disclosing their annual reports, earnings will bring new investment leads. ‘Whether to attack or to withdraw—we are also waiting for a clear signal,’ he said.”

Some fund managers also seek returns from more granular structures. “On the first day when the Middle East geopolitical conflict broke out, I reduced my allocation to the technology sector. In the following days, I added back again.” A fund manager for a technology-direction fund at a mid-sized fund company in Shanghai said. The reason is that the asset pricing logic has changed completely. It is either driven by demand that can trigger nonlinear explosions (such as AI compute power) or by supply constraints with rigid characteristics (such as strategic resources). For any category with a large supply-demand gap, as long as the demand logic does not change, prices are likely to keep rising. “Amid huge differences in opinion, you have to be bold enough to place a bet.”

“The AI story” and “the future of oil”

Amid confusion and divergence, the market’s main thread still revolves around AI and crude oil. From the viewpoint of institutional investors, these two asset types have created linkages, and in more detailed directions, institutions are “expanding frontiers.”

Zheng Weishan, manager of the 银河创新成长 fund focused on technology, said that the Middle East geopolitical conflict has interrupted supplies of materials that are indispensable in semiconductor manufacturing, such as helium and bromine. This will have a far-reaching impact on the industrial chain. “The impact on semiconductors shows a stepped transmission pattern—‘first raw materials, then energy, then logistics’—which will test the inventories and global reallocation capabilities of related companies. This is a huge variable for the fast-paced expansion of AI compute power. Helium shortages are directly linked to output of advanced process nodes, which could delay the large-scale ramp-up of the next-generation GPUs.” Zheng Weishan said. But the recent survey found that high-performance processors and memory chips still face more demand than supply.

Jiahe Fund believes that in the second quarter, growth stocks may no longer be just high-risk assets; instead, they will become a “hardcore hedging tool.” “AI could become a potential solution amid large swings in oil prices—geopolitical uncertainty leading to shipping disruptions and energy spikes is squeezing the gross margins of traditional manufacturing. At this time, the large-scale deployment of AI agents may serve as a potential lever for enterprises to defend against stagflation risks and achieve cost reduction and efficiency gains by replacing expensive human labor and management costs through automation,” Jiahe Fund said.

Besides the two major “storm centers” mentioned above, more narratives are extending in the A-share market—for example: the story of rising crude oil and a cyclical turning point is being taken up by chemicals; the intersection of undervaluation and growth lies in innovative drugs; the baton passed from traditional energy is—without question—the lithium battery sector; and the “starry sea” theme is covered by commercial space. But around these narratives, such as express delivery, the bull-cycle for commodities, fiber optics, and new consumer trends, some institutions consider them their “own territories,” trying to provide a bit of excess return to portfolios with enough research depth and the right kind of obscurity—or also to some extent as a kind of “safe harbor.”

(Editor: Wen Jing)

Keywords:

                                                            Fund