A Major Reversal in Dividend Distribution! Equity Funds Take the Lead for the First Time—How Should Investors Respond?

China National Radio Beijing, April 6 news (reporter Wang Ying). According to the Central Broadcasting Television General Station’s Economic Insights program “Tianxia Caijing,” the latest data show that in the first quarter of this year, the total amount of distributions by publicly offered funds reached 53.511 billion yuan. But more worth attention than the total figure is the historic reversal in the distribution structure— the share of equity fund distributions surged from 11% two years ago to 54%, while the share of bond fund distributions was cut roughly in half, from 88% to 44%. Behind this reversal, is it the short-term change in the market environment, or an inevitable trend in the industry’s development? How should ordinary fund investors interpret this signal?

In the first quarter, the publicly offered fund market saw a notable change. Not only did the distribution “cash bonus” of 53.511 billion yuan benefit a wide range of fund investors, but more importantly, the two-year “bond funds leading distributions” pattern was completely broken. Equity funds became the main force behind distributions in one fell swoop. This historic reversal is profoundly affecting the ecosystem of the capital market and ordinary investors’ choices for managing their wealth.

What force drove this reversal? Tian Lihui, dean of the Institute of Finance Development at Nankai University, said: “First, among the companies with profits in last year’s A-share market, 97% of the total distribution amount reached 2.4 trillion yuan—this is the source of funding for equity-fund distributions; it has never been this abundant before. Second is the ‘nuclear fusion’ effect of index funds: in the first quarter, passive index fund distributions accounted for nearly 70% of equity fund distributions, growing 4.8 times over two years. Broad-based ETF leaders topped the distribution ranking in the first four positions. Behind this is the efficient transmission of tens of trillions of passive capital to listed companies’ distributions, and then on to fund investors. Third is regulatory guidance shifting the industry from selling scale to selling returns. Fund companies no longer compete only on who can launch new products faster; instead, they compete on who can actually help investors receive cash.”

However, this structural change also brings new challenges to the publicly offered fund industry. Tian Lihui said that the volatility of equity fund distributions is far higher than that of bond funds, which may trigger investors’ psychological gaps and even a wave of redemptions. At the same time, it can easily trigger distribution competitions and short-term behavior.

“First, the volatility of equity fund distributions is far greater than that of bond funds. When the market adjusts, distributions may drop sharply. If investors get used to high distribution levels, then once the market turns downward, the psychological gap will be very large, even triggering a redemption wave. Second, the challenge is that it easily leads to distribution competitions and short-term behavior. Third, it raises higher requirements for investment research and management. When to distribute, how much to distribute, and whether distribution afterward will affect net asset value growth—this requires very precise judgment.” Tian Lihui said.

So for ordinary fund investors, what signal does this reversal in distribution structure convey? Does it mean everyone should massively sell bond funds and switch to equity products? Gui Haoming, a market participant, analyzed: “Although bond funds are still generally positive-return, the level of returns is relatively low. So it’s possible to make appropriate structural adjustments—turn part of bond funds into products similar to ‘fixed income plus,’ or even into relatively steady first-wave high-yield dividend fund products. These are all options to consider. Whether to increase investment in equity-type funds should also be discussed based on market conditions; you cannot infer this year’s arrangements based on last year’s returns. There needs to be a dynamic concept in it.”

Amid a dizzying array of fund products, which indicators should fund investors prioritize in real operations to avoid investment pitfalls caused by distributions? Gui Haoming suggested: “First, pay close attention to the fund’s style. Given the current situation, high-risk investments probably aren’t particularly suitable, so some relatively steady measures are also needed. Second, last year some structured products and style-based products had very high returns. In this case, whether they can maintain performance this year is something that also needs analysis. Third, of course the most important thing is to see that fund performance changes dynamically. You should stick to the mindset of long-term investing and value investing, and not change your approach due to short-term fluctuations.”

From the perspective of industry development, how should publicly offered funds respond to the future shift in distribution patterns? Tian Lihui put forward three suggestions: “First, establish institutionalized and transparent distribution policies so investors know when distributions will be made, how they will be made, and how much will be distributed, forming stable expectations. Second, do a good job of investor education and expectation management. Third, incorporate distribution capability into the investment research system. When fund managers select stocks, they should not only look at growth prospects, but also at the stability and sustainability of distributions. This itself will push the entire market to place more emphasis on the quality of enterprises. For each of us personally, the most important thing is not to chase funds that distribute more; it’s to find the one that fits your cash-flow needs and your risk tolerance capacity. That is rational investing.”