The investment landscape in China has been evolving, particularly in the realm of pensions and retirement planningAmidst declining yields in the bond market and increasing volatility in stock markets, a shift towards multi-asset strategies has garnered the attention of institutional investors looking to navigate through various economic cyclesSuch strategies typically involve diversifying investments across different asset classes, which may include equities, bonds, commodities, and even international markets.

Recent data indicates that many of China's prominent banks and financial firms have established dedicated multi-asset management departments

Furthermore, brokerage firms are actively implementing "all-weather strategies." Noteworthy players, such as China International Capital Corporation (CICC), Huatai Securities, and Huafu Securities, have joined this trendBy 2024, nearly 90% of public fund-of-funds (FOF) are projected to achieve positive returns, with several high-performing funds venturing beyond traditional stock-bond combinations and eagerly exploring commodities and overseas market exchange-traded funds (ETFs).

In a groundbreaking development, China recently welcomed its first global multi-asset strategy fund issued by a newly established foreign public fundFidelity Investments' recent launch of the Renyuan Steady Three-Month Holding Mixed Fund-of-Funds (FOF) is noteworthy, maintaining a significant allocation in bonds while limiting exposure to Chinese equities to approximately 8%. This fund also diversifies into international equities, bonds, and commodities

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Zheng Renyuan, a senior consultant at Fidelity Investments and a pioneer in target date funds (TDF), is advising this product, which seeks to lay groundwork for engaging with China's third pillar of pension markets.

The Shift from Traditional Fixed Income to Multi-Asset Strategies

According to Zhao Qiang, head of pension at Fidelity, the experiences of the past two years reveal that a typical fixed-income plus asset allocation (80% bonds and 20% equities) might face significant drawdowns, reaching over ten percentage points in certain contexts, thus affecting client experience

Zhao suggests that by incorporating more diverse asset classes, both domestically and internationally, alongside factor strategies, funds can potentially bolster their stability and yields, making them better suited for future pension products.

The emergence of the multi-asset strategy in China can be traced back to Ray Dalio's Bridgewater Associates and its all-weather strategy, especially prominent in the tumultuous market conditions of 2023. Bridgewater's private funds in China managed to maintain a level of around 10% returns amidst market churn, leading to a doubling in assets under management.

Zhao points out that such strategies are commonplace abroad, often involving cross-border and cross-asset approaches

This is in part due to the higher volatility of overseas fixed income products, including U.STreasury securitiesIn China, the bond market exhibits relatively lower volatility, leading to an emphasis on a fixed income plus strategy centered on bonds, complemented by equity investments, particularly in A-shares and H-shares, to enhance returns.

However, the fixed income plus approach has often backfired, resulting in the 20/80 allocations turning into fixed income minus in terms of returnsFor example, in 2014, a fixed income product increased by 20% in a short span, but took five years to recover to previous highsDuring the 2020 market upheaval, certain investors exited due to prolonged stagnation in returns, missing out on subsequent bull market profitsFluctuations in 2022 and 2023 further entangled numerous investors, leading to unsatisfactory holding experiences.

2025 Predictions: Gold and U.S

Stocks

Against this backdrop, the appeal of multi-asset strategies has been elevatedIn recent years, international equities, bonds, and gold have emerged as primary investment targetsGold reached a historic peak at $2,790 in October 2024, marking a 27% annual increase, the highest since 2010. Central banks in countries like China, Russia, India, and Turkey have been actively purchasing gold as part of their reserves.

Reports indicate that the “gold plus” allocation strategy is gaining traction, particularly within institutions that amplify their allocations to gold through ETFs and integrate it into pension planning, mixed funds, and more

For instance, institutions such as China Merchants Bank Wealth Management and Invesco Great Wall have reported allocation levels of 5% to 10% towards gold in their portfolios.

Zhao has confirmed that in the recent FOF issued by Fidelity, the benchmark allocation to commodities, including gold, is around 5%, primarily focusing on Shanghai Gold Exchange pricingDespite a temporary dip in gold prices as the dollar strengthens, the long-term bullish outlook for gold remains intact, and Fidelity maintains a positive stance heading into 2025.

Moreover, international stock markets have surfaced as a focal point for domestic institutions, utilizing instruments like QDII funds and mutual recognition funds, with U.S

stocks being a common choiceThe Nasdaq-100 outperformed significantly in 2024, with companies like NVIDIA and Broadcom enjoying meteoric rises of 170% and 109%, respectively, fueled by the AI boom.

Considering the overall landscape, predictions from Wall Street analysts for the S&P 500's mid-year target are around 6,600 points, with the highest projections reaching up to 7,000 points.

In terms of domestic assets, Chinese government bonds, A-shares, and H-shares hold significant importance in multi-asset strategiesZhao mentioned that for FOFs, the benchmark for bonds is based on the comprehensive index yield of the China Bond market, with an approximate allocation of 75%, while the share of interest-rate bonds is kept between 20% to 30%. Recently, the 10-year bond yield rapidly decreased from 2% to below 1.6%, indicating a potential adjustment of interest rates, while credit bonds may still have room for upward movement.

It is worth noting the general consensus regarding the potential for China's stock market to recover under policy stimulus, despite its high volatility, which necessitates a cautious approach when implementing multi-asset strategies.

Zhao further analyzed the volatility dynamics, indicating that while the S&P 500's volatility is about 12%, China's volatility may reach between 20% and 25%. This significant difference in risk-return profiles encourages a more conservative allocation strategy in Chinese stocks within multi-asset frameworks.

Looking towards the first half of 2025, there may be a potential rebound in the Chinese stock market due to liquidity support; however, the trajectory in the long term will hinge on genuine improvements in corporate earnings

It becomes crucial to monitor the solidity of earnings post-Q1, with a favorable outlook towards A-shares compared to H-shares.

Multi-Asset Strategy as the Cornerstone of Pension Investment

The attraction of multi-asset strategies for foreign entities also hinges on China's burgeoning "third pillar" market for pensions

Currently, China's personal pension investment system has been operational for two years, demanding effective management of volatility and the pursuit of absolute yields for pension FOFs, thereby augmenting the imperative for sophisticated multi-asset allocation capabilities.

In the first half of 2024, over 80% of pension fund Y-share products from Chinese institutions failed to outperform benchmarks, a phenomenon attributed to excessive equity allocations leading to heightened portfolio volatilityAs the industry looks ahead, optimizing cross-asset and cross-border investment strategies becomes paramount.

Industry experts have previously expressed the sentiment that the global allocation capabilities of domestic fund companies still need enhancement

Many FOF fund managers have backgrounds primarily in equity investmentsIn contrast, genuine multi-asset investing is a nuanced discipline that transcends mere stock selection and risk assessment.

The predominance of multi-asset strategies overseas is encouraged by the evolving needs of pension investmentIn the U.S., target date funds (TDF) remain the cornerstone for retirement products—setting out an expected retirement year and adjusting asset allocations according to the investors' risk profiles and time horizonsThe closer the target date approaches, the more the fund reduces exposure to equity assets while increasing allocations to non-equity assets, epitomizing the multi-asset strategy.

Zheng Renyuan has elucidated the high entry barriers in pension investment products, which tend to result in market consolidation dominated by major players such as Fidelity, Vanguard, T

Rowe Price, and BlackRockFor newly established foreign public funds targeting the third pillar pension management qualification in China, there remains the prerequisite of maintaining over 20 billion yuan in assets for three consecutive yearsThough these scale requirements persist, these established foreign pension management giants are gearing up to meet them.

Zhao informed that the risk profile of the latest FOF products aligns closely with TDFs designed for individuals aged 40 to 60, thus leaning towards a more conservative strategy while ensuring core risky assets—comprising Chinese and U.Sequities—do not exceed 20% in allocation, aiming to foster a more satisfying investment experience for clients.

In the medium to long term, there are still limitations in the available investment tools for pension products in China