Chapter 20 How institutional investors thrive

China started to vigorously develop institutional investors in 1998, but the overall effect was not very good.What experience does foreign fund development history tell us?What are the prerequisites for the development of Chinese funds?How to promote and guarantee the healthy growth of China's fund industry? ◎Reporter: In recent years, China has vigorously developed institutional investors and achieved certain results, but the overall effect is not very good.In the history of American securities, how did institutional investors develop? Chen Zhiwu: The development of open-end funds in the United States is closely related to the development of pension (401[k]) and related legislation.Institutional investors in the United States play a major role in the securities market. As an industry, institutional investors have developed to such a large scale mainly in the last thirty or forty years.Prior to this, the major institutional investors were insurance companies, the proprietary arms of Wall Street securities firms, university endowments, and nonprofit organizations.But at that time, endowment funds were more conservative than insurance companies, and their participation in the stock market was not very high. They mainly invested in financial products with relatively low risks such as government bonds and corporate bonds. Before the advent of 401(k), there were very few institutional investors in the United States.Hedge funds are also an important institutional investor. They developed for many years before the success of the Soros Quantum Fund, but they had little influence, and only began to develop after the 1970s.In other words, before open-end funds, 401(k), and pensions became mainstream institutional investors, the institutional investors who really participated in the stock market were mainly insurance companies.

The earliest mutual fund (also called open-end fund) in the United States was the "Massachusetts Investors Trust" established in 1924.Mutual funds had some development before the stock market crash in 1929. After the stock market crash, the entire fund industry entered a long-term depression along with the stock market.By 1951, the number of mutual funds in the United States was about 100, and the number of people who held fund shares was about 1 million.From 1924 to the late 1950s, the development of open-end funds in the United States was not smooth. The stock market was depressed in the 1950s, and American society at that time did not understand the role and benefits of fund management.By the beginning of 1960, the number of mutual funds in the United States was only 155, with a total capital of 15.8 billion US dollars under management. Ten years later, the number of funds increased to 269, with a total of US$48.3 billion in funds under management.By the beginning of 1980, the total number of funds was 524, with a total management fund of 94.5 billion US dollars.

◎Reporter: It seems that the US fund industry did not have smooth sailing for a long period of time in its initial stage of development.But now that the U.S. fund industry is so developed, what is the experience during this period? Chen Zhiwu: The biggest milestone in the U.S. fund industry was the passage of a bill by Congress in 1978, which allowed company employees to put part of their monthly salary into retirement accounts before tax and then invest in various funds. This is the so-called 401(K) retirement account. The money in this account can only be put into the fund.The Act came into effect in January 1980. In 1981, Congress passed a bill to allow everyone to establish an "Individual Retirement Account" (Individual Retirement Account, also known as IRA).The money put into the IRA account is pre-tax income, and these investments can only be realized after retirement, and no matter how much these investments earn, they can enjoy tax benefits.By the end of 1981, a total of 7.54 million people had 401(K) retirement accounts, and the total amount invested in various funds in these accounts was 91.75 billion US dollars.

By the beginning of 1990, the number of open-end funds had soared to 2,917, with assets under management of US$982 billion.Meanwhile, the number of people with 401(k) retirement accounts reached 19.54 million, who put $384.9 billion into the fund, or about 40 percent of all open-end funds under management.By the end of 1998, the number of mutual funds had exceeded 8,000, and the funds under management were about 6.8 trillion US dollars, of which about 54% were invested in the stock market, and 39.5% were invested in bonds. 20%.As of the end of 1998, about 37.15 million people had 401(K) retirement accounts, and they invested a total of 1.54 trillion U.S. dollars in various mutual fund companies.

Accompanied by the rapid growth of 401(K) and IRA retirement accounts, coupled with a number of legislation in Congress in the 1980s and 1990s, encouraging people to save and invest for retirement, this not only made the fund management industry soar, but also the entire industry The stock market rose. The tech bubble of the 1990s was actually related to pension legislation and the growth of the fund industry.The development history of hedge funds in the United States is very short, but due to the success stories such as "Quantum Fund" and "Tiger Fund", the hedge fund industry gradually grew in the 1980s and 1990s.Today, the number of hedge funds is no less than 8,000.

◎Reporter: The rapid development of the US fund industry has a lot to do with the government's incentive policies.Before the introduction of government policies, we knew that to allow individuals to give funds to institutional investors, institutional investors must first give individuals a sense of trust.On this basis, the institution itself must have sufficient professional standards and good management standards to be able to give relatively high returns to individual investors.So how did institutional investors complete such a process in the history of the United States? Chen Zhiwu: I answer this question from the perspective of incentive structure.Fund management companies in the United States are all private companies, there are no state-owned companies, and each founder owns a large share of the management company.The promoters of the fund management company can own 100% of the shares of the management company if they wish, and the United States has no restrictions in this regard.Most of the fund management companies in the United States are not listed, but are partnerships.The vast majority of fund management companies were rarely listed a few years ago, and the famous Fidelity Fund Management Company was only listed a few years ago.Therefore, the interests of the sponsor and the interests of the fund shareholders are consistent. He has 100% incentives to do a good job in the business, and they will really put the interests of the fund shareholders first.

Risk management is a very important part of fund operations. If risks are well controlled, the profitability of the fund will be high, and the fund will be able to reflect the characteristics of expert financial management.The higher the fund's profitability, the more profits investors can get.Profitable investors will have a publicity effect, more people will invest in the fund, and the fund industry will enter a virtuous circle. American fund management companies will really carry out risk control.Unlike domestic fund management companies, although every fund company emphasizes risk management, each company spends a lot of money to send employees to participate in risk management training to learn how to manage risks.However, fundamentally speaking, as long as these fund management companies and securities companies are state-owned enterprises, the same problems will arise in other state-owned enterprises. How can these personnel be motivated?The general managers and chairman of fund management companies and securities companies are largely appointed by the government.The performance of the fund does not affect the promotion of the general manager and chairman. People lack incentives to carry out risk control, so no one really cares about risk control.How can a fund without risk control have good performance?How can it attract more investors to buy without good performance?

◎Reporter: Judging from the development status of China's fund industry, there are indeed some problems.On the one hand, it is difficult to sell open-end funds, and on the other hand, the redemption of open-end funds is very serious.The development of Chinese institutional investors may face serious problems. Chen Zhiwu: Like any industry, the fund industry also has a bottom-line scale. Only when it reaches a certain scale can it attract enough attention and more talents will understand how the industry works.This is why there were only a few hundred funds in the United States before the 1970s, because at that time the vast majority of American people did not know what the fund industry was all about.In addition, at that time, the level of participation of ordinary people in the stock market was not very high.

Many people in China have not realized that whether it is a closed-end fund, an open-end fund or a hedge fund, they can all be regarded as derivative products of the underlying securities.The fund itself holds other securities, and the fund combines stocks, bonds, and other securities into shares, and fund investors buy shares in the portfolio.In this sense, the fund can be regarded as a kind of derivative securities, and its value comes from the underlying securities. ◎Reporter: That is to say, if the quality of the underlying securities is not high, there will be problems with the derivative securities.

Chen Zhiwu: Yes.When discussing the development of the fund industry in China, they are too optimistic, thinking that fund products will definitely be welcomed by the common people.They ignore the characteristics of derivative securities.Judging from the history of the development of futures, options and other derivative securities in the United States, any derivative securities, if the underlying securities it relies on are not very active and popular, it cannot be expected that the derivative securities launched on its basis will be popular with investors. welcome.Whether any derivative securities are successful and active depends first on whether the underlying securities are successful and active.If the basic securities are not actively traded and investors are not enthusiastic about participating, derivative securities launched on this basis will be difficult to succeed.

Stock market development is one of the prerequisites for the development of fund companies.In the past two years, China's stock market itself has been relatively deserted, and many people think that investors will pursue funds, but it is not so easy to sell funds now. I think this is a completely predictable result.In other words, the rapid development of China's fund industry cannot be achieved unless the stock market has developed well before that, the transactions are active, people's demand for stocks is high, and there is sufficient confidence and trust in the stock market.Otherwise, there is no way to talk about the fund market based on the stock market. ◎Reporter: That is to say, in order for funds to develop well, the stock market must first develop and become an effective market, and then more people will be attracted to participate in the stock market and invest in funds. Chen Zhiwu: Indeed.From a conceptual point of view, why do ordinary people welcome funds?There must be a premise, that is, there are too many stocks in the stock market, and ordinary people do not have enough professional knowledge, nor do they have enough time and energy to choose and buy stocks, but they are very optimistic about the stock market and very much hope to participate in the investment opportunities in the stock market. demand for professional fund managers.Professional fund managers invest full-time, track stocks and different listed companies, and look for the best investment opportunities, so that they can replace those who want to enter the stock market but do not have the knowledge and time to participate in the stock market investment.This creates a need for professional fund managers.However, when the domestic fund was launched, it did not conduct sufficient investigations and did not consider whether there was such a demand for professional fund managers in the market. Instead, it launched open-end fund products when the stock market was in a downturn.What people in the fund industry didn't expect was why the common people were not optimistic about such a good concept.Obviously, there is a problem of understanding fund products here.In addition, the Chinese fund industry has unrealistic expectations for the development of funds in China.When launching this new product, everyone talked about the good aspects of this product, and no one talked about the negative aspects of this product, nor did they consider whether the reality could meet expectations. Before the 1960s and 1970s in the United States, the participation of all ordinary people in the stock market was not too high.It is not so easy to develop the fund industry or the institutional investor industry when ordinary people do not have a high degree of participation in the stock market. The growth of the stock market itself is a very important determinant of the development of the US fund industry.This is a very important lesson for the Chinese fund industry. ◎Reporter: Since the fund industry relies more on the rule of law and integrity, the potential moral hazard and risk of hollowing out are particularly high.At present, the China Securities Regulatory Commission has very detailed control over fund companies. From fund sales to fund management, fund investment portfolios, and fund transaction procedures, all are strictly regulated by the China Securities Regulatory Commission.How does the United States regulate the fund industry? Chen Zhiwu: In the early days of mutual fund development, the US government basically did not impose any controls on fund companies, did not set up administrative obstacles for them, and allowed the industry to develop relatively independently.Even today, for example, fund companies do not have any bottom-line registered capital requirements.There are no restrictions on the investment scope of open-end funds in the United States, and there are many varieties that can be invested, such as: domestic and foreign stocks, corporate bonds, real estate funds, federal government bonds, state government bonds, local government bonds, special project bonds, and hedge funds can also invest in options , Futures and other derivative products and private equity investment. When American funds started to develop, they were all partnerships, usually with only a few partners, like my own hedge fund.But if we want, we can also register as an open-end fund and keep the existing three partners.However, from an incentive point of view, this possibility is unlikely.Because the incentives to be a hedge fund are higher, the management fee earned by an open-end fund is very low, and you have to do a lot of information disclosure work, which is regulated by the US Securities Regulatory Commission, and you must disclose very detailed information every quarter. information.In order to handle these matters and fill out those forms, accountants and lawyers must be hired, and two or three additional employees must be hired.There is not much economic benefit in doing these things. ◎Reporter: That is to say, you can choose what kind of fund to set up in the United States, and there are not as many restrictions as in China. Chen Zhiwu: Yes.In contrast, according to Article 13 of the China Securities Regulatory Commission's "Administrative Measures for Securities Companies", when a securities company establishes an investment management subsidiary, the bottom line registered capital is 500 million yuan.The micro-management of the fund by the China Securities Regulatory Commission has reached the extreme.In previous years, each shareholder of China's fund management companies could not hold more than 25%.Each fund company has 4 shareholders, each shareholder does not hold a controlling stake, and 20% of the investment portfolio must be in public bonds.Fund management companies have many strict regulations. Employees must hand over their mobile phones whenever they enter the trading hall. They are not allowed to make private calls. Every call must be recorded, and every transaction must be submitted to the Securities Regulatory Commission every month. . A lesson can be drawn from the development of China's fund industry. If China's fund industry started to develop, it would not have been created by the China Securities Regulatory Commission as a "child" like it is now, and the entire fund industry was run by administrative officials. It may develop even more. better.As a new industry, we should first let it develop slowly from the private sector. After accumulating a certain amount of experience, we should consider what should be regulated and what should not be regulated. That way it may develop better, and the service and integrity of fund management companies will be improved. Could be better.The current practice of cultivating by the China Securities Regulatory Commission is very tiring, and the "children" cultivated may not be very healthy. ◎Reporter: Because of this, individual investors in China do not directly invest their funds in the stock market or hand them over to funds, but invest their funds in the real estate market, and obtain better returns through the appreciation and leasing of real estate.However, there have been many problems with this investment method, such as the high risk of mortgage repayment for individuals, and the chaotic housing rental market, which is not conducive to the development of the real estate market.In this case, how can institutional investors play its role, and how does the United States do it? Chen Zhiwu: Open-end funds in the United States can buy shares in real estate funds, but they cannot directly invest in real estate.US real estate fund REITS enjoys many tax incentives.If the shares are issued in the form of REITS, institutional investors who buy REITS will not be taxed on the money they earn from real estate fund dividends. This tax preference attracts many institutional investors to buy.This kind of real estate fund is similar to what is understood in China. It can directly invest in real estate development. After the development is completed, it will be responsible for property management, provide services, and get rent.Many commercial buildings raise funds through real estate funds issuing shares, and the amount of such real estate funds in the United States is very large. China does not have the same tax environment and legislative environment as the United States. The launch of real estate funds in China is mainly as an investment product, which is a good investment channel for both institutional investors and ordinary people.Chinese investors don't believe in stocks, and there are very few corporate bonds. The remaining investment products are government bonds and banks. 85% of the public's financial assets are saved in banks.Bank interest rates are fixed, and Chinese people have no way to share the benefits of China's rapid economic development, nor can they share the profits of listed companies.In recent years, real estate has developed rapidly. If a real estate fund is established, both institutional investors and ordinary people can share the profits of the rapid growth of real estate. ◎Reporter: If Chinese institutional investors want to grow and develop, what suggestions do you have? Chen Zhiwu: If Chinese institutional investors want to grow stronger, they must develop more financial products that can share the benefits of national economic development. At the same time, let private capital enter, change the regulatory model, and let the fund industry develop spontaneously.