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Talents in the quantitative circle have dominated the market in the past few years, and now they are "voicing" the active investment strategy market.

Recently, a "rising star" institution with a market value of tens of billions in China's quantitative circle published a quantitative research report on the mainland stock market.

The report mentions the following two key conclusions:

1. Although general value investing (fundamental investing) has not earned much excess returns in the past five years, in the medium and long term, there is a value premium in the A-share market (that is, value investing is still effective).

2. Although the general value strategy is still effective, mechanically implementing this strategy cannot guarantee excess returns in the long term.

To sum it up in one sentence: Active investment in A-shares has become more difficult, but it is not outdated.

The logic behind this has really aroused the interest of the market.

"New" Quantitative Institution with a Billion-Dollar Expenditure

In the private equity industry, quantitative investment institutions with a entrusted scale of more than 10 billion are already industry leaders.

The aforementioned institution that published the research opinions happened to continue expanding in 2024 and reached a scale of 10 billion.

In this year's market where quantitative investment is also facing difficulties, the fact that this institution raised more than 5 billion yuan against the trend can only mean that its quantitative investment strategy has continued to be "effective" in the past few years.

When it comes to investing in A-shares, they are quite skilled.

Sharp point of view "Close to the face and open wide"

The latest article published by this quantitative rising star is titled "Value Investment in A-Shares". The entire article contains a lot of professional terms and the language style is close to "academic".

The article focuses on the current controversial active value investment in the market, and discusses its performance in the past few years and its possible future development prospects from a quantitative perspective.

This quantitative institution has drawn a clear conclusion through its own data model:

First, in the long run, there is a value premium in the A-share market.

In other words, the active value investment strategy is effective in this market, and undervalued companies will perform better than overvalued companies.

Second, although we are optimistic about the "general value strategy", we believe that mechanically implementing this strategy cannot guarantee excess returns in the long run.

(Editor’s note: Perhaps out of habit, this article will refer to active fundamental investment as “value investment” or “general value strategy”.)

Value strategies often have cyclical fluctuations

In the eyes of this quantitative rising star, traditional value investing did not perform well in the previous five years (2019-2023) until it rebounded sharply in 2024.

Moreover, in the long run, the returns of this strategy are subject to severe cyclical fluctuations, and the mean tends to be downward.

The private equity firm also cited two points from a quantitative perspective that may be overlooked by general value strategies:

First, traditional valuation indicators cannot fully measure the intrinsic value of a listed company. For example, they ignore the intangible assets brought by the company's R&D investment.

Second, the crowding of the value factor has increased significantly, and more investors in the market are allocating value factors through smart beta funds.

Therefore, this quantitative institution made suggestions to A-share value investment institutions or subjective funds:

Managers need to innovate general value strategies and apply more detailed investment logic and more comprehensive data summarization to production.

It is recommended that the management agency lower the "high rate"

This article also provides important advice to funds that implement traditional value strategies, calling on them to pay attention to controlling their management fees.

Because there may be a trend that mainstream institutional investors will gradually find that if the manager simply implements a general value strategy, after deducting management fees and transaction costs, the fund returns in most cases will be inferior to those of low-cost and high-transparency value-based Smart Beta funds.

At present, the representative products of mainstream subjective private equity institutions charge a fixed management fee of 1.5% and a profit share of 15% to 25%.

But these products will need to prove to investors that they have the ability to consistently outperform smart beta funds.

Advice to investors to diversify their investments

The quantitative giant also believes in the article that it will be difficult for investors to continue to generate excess returns by mechanically allocating general value strategies in the future, and may even experience severe fluctuations.

Their advice is not to put all your money in “one basket” but to diversify across other investment strategies.

The private equity firm added that tactical opportunities (overweight or underweight) regarding the value factor have continued to exist over the past decade and it believes that this trend will continue for the foreseeable future.

I believe that this tactical opportunity requires very professional investors to seize.