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The launch of Tianhong Yu'ebao is undoubtedly an important milestone in the development of asset management and even financial products in China. The success of Tianhong Yu'ebao is due to the unique Internet thinking in product design and the user traffic brought by Alipay, as well as the explosive growth of fixed-income assets driven by interest rate liberalization.

Under the trillion-dollar entrustment, Tianhong Fund has taken "sound financial management is trustworthy" as its own philosophy, and has integrated the pursuit of stability into product management, investment research concepts, business ideas, etc. The ultimate pursuit of stability and reliable quality ultimately leads to the scientific requirements for bond investment.

There is no smooth road in science. After repeated assumptions, analysis and demonstration, we abandoned analysis software such as Excel and EViews and introduced Python, a tool that better meets the needs.Tianhong Fixed Income Team has created a set of rich Tianhong Five CyclesThe model combines the macro schools and trading schools in the fixed income field, and includes both top-down macro and policy analysis as well as bottom-up analysis of sentiment, positions, and investor behavior.

Based on Tianhong Five Cycles, they have realized various ideas about scientific bond market investment: First, establish a comprehensive and objective understanding of the bond market, break the wrong common sense, discover the complex relationships and laws hidden behind it, and derive reliable investment strategies, so that investment becomes more predictable and replicable. In this process, using programming tools for complex quantitative analysis has become a necessary skill. Second, use a unified research framework to form a team into an investment platform with professional division of labor and close collaboration, give full play to collective strength, get rid of the limitations of a single fund manager, and make the investment research level more reliable. The team combat mode, in turn, requires each fund manager to conduct research personally, get to the essence in communication, and achieve efficient transmission of information. Third, incorporate the time factor on the liability side into the investment research system, manage the assets and duration distribution of the product portfolio more finely, and make the product more compatible with the risk-return demand on the liability side.

Today, fixed income investment is becoming increasingly difficult. How to resolve the divergence between macro and micro, how to achieve a win-win situation between platform and personal value, how to face a market where macro black swans continue to appear, how to make excess returns in an increasingly "volleyed" market, etc. These problems bother many people. Through an in-depth interview with the fixed income team of Tianhong Fund, we believe that we will provide you with the answers.

Using the "Tianhong Five Cycles" model

Achieve systematic and team-based investment

Benefiting from the success of Tianhong Yu'ebao in 2013, Tianhong Fund established a large fixed income research team in the industry very early. In the early days when many fund companies only had 3 credit researchers, Tianhong Fund already had 10 members. However, with the development of the times, they also saw two important changes in fixed income investment, which promoted the further iteration of the investment system.

The first change is that after 2020, the amplitude of macroeconomic fluctuations has decreased, but the frequency has increased, and fixed-income investment is no longer a simple open and close approach.Before 2018, the judgment of economic cycle and inflation could be the deciding factor in fixed income investment. However, after that, the volatility of economic cycle decreased and the duration of the cycle state was significantly shortened, so the driving force of economic growth on changes in bond market yields became more complicated, and subtle observation of economic growth became important.

Tianhong Fund's fixed income team found that the macro economy had stabilized in 2016, and theoretically the bond market should have been in a bear market, but it continued to be bullish for three consecutive quarters. A similar situation occurred in 2018, when the macro economy was not particularly bad that year, but the bond market reversed.

Bond yields sometimes deviate from macroeconomic trends, which is also caused by the misalignment between the macroeconomic cycle and the monetary policy cycle. The direction of changes in bond yields is not only determined by economic momentum, but also dominated by the central bank's monetary policy. For example, in the second half of 2019, the inventory cycle continued to move upward, but bond yields went out of a downward trend in a loose monetary environment. From a macro perspective, this is the central bank's cooperation with loose monetary policy in the early economic cycle to help economic growth, so an economic upturn does not necessarily lead to an upturn in yields. During this period, the study of institutional behavior can better grasp the granularity of yield trends.

These major deviations have made them realize that there is no longer a "one-size-fits-all" way to make good bond investments every year. As the entire fixed-income asset class grows, the behavior of participants is also affecting market trends.

The second change is the introduction of new asset management regulations in 2018, which became an important watershed in the fixed income investment field.The institutional dividends are gradually disappearing, and the defaults of some private enterprises this year have also caused many fund companies to give up credit sinking. Bank wealth management upstream of fund companies has also reduced its risk appetite at the credit level. At the same time, yield mining in the downward cycle of interest rates has become more refined.

The fixed income team of Tianhong Fund has seen that after the introduction of the new asset management regulations, the investment capabilities required of practitioners have become increasingly higher.In a fixed income investment field dominated by institutional investors, it is necessary to build a multi-angle, systematic and team-based investment framework.Moreover, this framework can take into account the subjective abilities of each fund manager, leveraging their strengths and avoiding their weaknesses to give full play to the team effect.

Under the paradigm shift of investment, Tianhong Fund has created a unique "Tianhong Five Cycles" bond investment model.

Data source: Tianhong Fund

This model solves four levels of problems:

1) Combination of macro school and trading school.When Tianhong Fund sorted out the bond fund managers in the market, it found that there were mainly two major investment schools: the macro school and the trading school. In the past, these two schools communicated in completely different "languages", corresponding to their own independent and specialized investment cycles. From the objective data, both schools are not perfect, but they also have their own adaptive stages. In addition, in the downward cycle of interest rates, it is difficult to meet customers' investment goals by relying solely on macro-level judgments, and more trading-level enhancements are needed.In the "Tianhong Five Cycles", the combination of the two major schools of macro and trading is solved through stratification in investment.

2) Complex responses to a complex world.Tianhong Fund's fixed income team believes that the investment world is not a simple one, but requires a system to cope with the changes in the complex world. There are many factors that affect the trend of bonds, and the weights of various factors are different at different time points. The "Tianhong Five Cycles" model divides the factors that affect the trend of bonds into macro cycles, policy cycles, institutional behavior cycles, position cycles, and emotional cycles according to the top-down influence, covering the main factors affecting the bond market. At the same time, each layer incorporates different time dimensions. The upper macro and policy cycles affect the long-term dimension, and the lower institutional behavior, position, and emotional cycles affect the medium- and short-term dimensions. The direction of the market is different in different time dimensions. This also solves the problem of "fighting" between long-term and short-term views.

3) Realize the dual characterization of bond market winning rate and odds.Tianhong Fixed Income Team believes that looking at the bond market from the perspective of macroeconomics and monetary policy are all things at the level of winning rate, which affects the staged direction. However, things at the level of odds and amplitude need to be provided by a series of indicators in the medium and short cycles. Tianhong Five Cycles contains a complete odds system indicator.

4) Unify individual capabilities into team capabilities.Since there are many factors affecting bond investment and the variables at different stages are different, the demand for team cooperation and investment research platform is very high. On the other hand, every fund manager and researcher has his or her own areas of expertise. How to let them empower others with their strengths is a problem that all fixed income investment teams need to face.

Under the framework system of "Tianhong Five Cycles", a professional division of labor at the research level has been formed. Every fund manager is a researcher, who mainly focuses on areas of his or her expertise and empowers others, while areas not of his or her focus are empowered by other fund managers.Under this large framework system, the wisdom of everyone is gathered to form a model of mutual empowerment and collective combat. Everyone will not have obvious shortcomings in their perception and judgment of various aspects of the market.

Figure: Division of work and collaboration among fund managers in Tianhong’s five cycles

Data source: Tianhong Fund

Three major characteristics of Tianhong's five cycles

Through communication with the fixed income team of Tianhong Fund, we found that the "Tianhong Five Cycles" model has several unique features in its specific operation process.

The first characteristic of Tianhong Five Cycles is its rich five-level sense, which grasps both short-term and long-term changes, covers the main influencing factors of the bond market, and has clear primary and secondary relationships and importance weights in different cycles.

The bottom layer is the sentiment indicator, which is mainly determined by the position cycle of the upper layer. As Tianhong Fund's short-term debt management team leader and fund manager Zhao Dinglong said: "No matter how optimistic the sentiment is, if the position is full, the sentiment will not be optimistic." The position cycle is related to the behavior of institutional investors at the upper layer. Institutional investors increase their allocation, which is a passive position increase. Conversely, the bottom-up sentiment cycle will lead to active position increase.

The middle is the investor behavior cycle. In the behavior cycle, Tianhong Fund's fixed income team continues to divide it from two dimensions. One is to divide it into trading institutions and allocation institutions according to investor types, and the other is to divide it into high-frequency trading and trend trading according to trading style. For example, banks usually do value allocation, while rural commercial banks usually do excess liquidity allocation; securities companies usually do high-frequency trading, and fund companies usually do trend trading.

The next level is the monetary policy cycle. The loosening and tightening of monetary policy determines the behavior of institutional investors at the next level. The highest level is the macroeconomic cycle, which determines the monetary policy cycle at the next level. These two macro cycles are also used in traditional bond investment. Big changes from top to bottom will correspond to big trends from bottom to top.

In addition to the top-down nesting, the balance sheets in this model are also closely linked. Each level has two perspectives, the liability side and the asset side, which are linked to the assets and liabilities of the previous level. For example, the asset side of the position cycle is the position and emotion, but the liability side is the behavior cycle of the previous level. In Zhao Dinglong's view, changes in the liability side will directly affect the performance of the asset side, just like if a person is sick or unemployed (changes in the liability side), it will also affect his asset-side behavior.

After breaking down the five major factors that influence the bond market, the "Tianhong Five Cycles" model is not a simple comparison of the weights of negative and positive factors, nor is it a simple addition of the scores of each factor. Instead, it uses nonlinear changes to guide specific investment decisions, that is, different cycle levels have different impact magnitudes.

The impact of the macro cycle is greater in magnitude and lasts longer; the impact of the position cycle is smaller in magnitude and lasts shorter.

When the signals of the Tianhong Five Cycle contradict each other, we can reach a relatively conclusive conclusion based on the principle that the lower cycle obeys the upper cycle and the closest cycle has the greatest influence.

Ren Ming, head of the credit research department and fund manager of Tianhong Fund, gave an example: "In the first half of 2021, the macro cycle was relatively strong, commodity prices rose, and real estate sales were good at the beginning of the year, but the bond market was out of a bull market. If you only look at the macro at this time, you will miss the opportunity. In fact, the core reason for this wave of bond bull market is that the monetary policy has not changed. Although it has not been relaxed, it has not been tightened either. It is equivalent to the monetary policy cycle resisting the negative impact of the macro policy on the bond market in a quarter or half a year, thereby making the institutional behavior cycle the main contradiction at the stage, and out of a bull market. Therefore, under the environment at the time, we should actively go long within the half-year dimension."

Celestica Five CyclesThe second characteristic is that it has a very strong objective explanatory power for various phenomena in the bond market. It can avoid erroneous common sense, correct many specious views in the market, and accurately depict the specific impact of changes in various factors, so that fund managers have higher confidence when making investment decisions, thereby better grasping investment opportunities and avoiding risks in advance.

For example, some people in the market believe that a cut in the reserve requirement ratio will drive up the A-share market, but in fact, the central bank's cut in the reserve requirement ratio does not directly correspond to the rise of the stock market. It is more that after the credit conditions are relaxed, liquidity flows from top to bottom. The final performance of specific assets also needs to take into account the bottom-up investor behavior and sentiment.

For example, most people in the market believe that credit spreads are mainly related to DR007 or funding rates, which are determined and dominated by the central bank, but this is not always the case. In fact, after 2020, credit spreads continued to shrink because residents continued to invest in stable assets after the real estate market failed to pick up.

To understand and analyze this type of capital phenomenon in the "Tianhong Five Cycles" model, a key indicator corresponds to it: Flow, which has both a quantitative perspective and a directional perspective.The water of the Yangtze River will eventually flow into the sea, but which fork it will take requires both a high-altitude bird's-eye view of various assets (the height of the terrain) and a more microscopic perspective to gain insight and verification.

With the help of Tianhong Five Cycles, the fund managers of Tianhong Fixed Income Team have achieved in-depth and objective insights into the operation of the bond market, rather than vague physical feelings and judgments. This enables fund managers to have higher confidence in the investment process, scientifically predict the size of the market and allocate reasonable positions.

Peng Wei, head of the interest rate commercial finance group and fund manager of Tianhong Fund, took the recently hotly discussed 30-year ultra-long bonds as an example. If there are only the two layers of macro cycle and monetary policy cycle system, it is difficult to understand why ultra-long bond assets can continue to rise. However, from the perspective of the institutional behavior cycle, the 30-year treasury bond is one of the few varieties that have both trading attributes and configuration attributes. Its rise has a solid foundation at the institutional behavior level.

Ren Ming further explained: "Many people will use some long-term logic of grand narratives such as zero interest rates to explain the rise of 30-year treasury bonds. This is of course no problem, but applying this logic to the 30-year treasury bond market in the first quarter of 2024 is a bit far-fetched and excessive. Even in a long-term downward interest rate cycle, there will be some rebounds."

In the view of Tianhong Fixed Income Fund Manager, the main driving factor behind the sharp rise in 30-year treasury bonds is the asset shortage faced by insurance institutions and rural commercial banks.

Taking insurance institutions as an example, their liabilities have grown rapidly because residents have a strong demand for stable assets after they stop buying houses. Starting from 2023, as real estate and local debt problems become more prominent, insurance institutions have taken the initiative to reduce the proportion of non-standard assets.

Under multiple superpositions, the demand for bond allocation by insurance institutions continues to grow, especially due to the lack of long-term assets. In the case of relatively small supply of long-term assets at the beginning of this year, 30-year treasury bonds were sought after by insurance institutions, and a resonance-like rise occurred. After understanding the real reason for the rise of 30-year treasury bonds, Tianhong fixed income fund managers calmly participated in this wave of market, rather than passively chasing the rise based on momentum trading.

Peng Wei also gave his judgment on the subsequent evolution: "After the insurance allocation plate leaves the market, if the 30-year treasury bond only has trading attributes, it is necessary to observe the price level and position level. For example, when the fund's position level as a trading plate is low, the odds are relatively high. When the position level is high, especially at a historical high, the odds of going long are very low."

With the help of Tianhong Five Cycles, Tianhong Fixed Income Fund managers have achieved an objective and comprehensive grasp of the changes in the bond market. In addition to better capturing investment opportunities, they can also predict risks more proactively, avoid large drawdowns, and make informed decisions.

Ren Ming took the bond volatility in the fourth quarter of 2022 as an example and said: "On the surface, that round of bond market volatility was caused by factors such as the adjustment of epidemic prevention policies and the introduction of real estate policies, but the root cause lies in the fragility of the market itself. Due to the bull market in bonds in the first three quarters of that year, many bank net-worth wealth management products performed very well, causing some low-risk preference users who originally bought money market funds to transfer funds to such wealth management products. These funds are fragile and are extremely short-term liabilities, but at the same time, bank wealth management products began to extend the duration when allocating assets, which formed a dislocation. This is the situation at the behavioral cycle level."

Peng Wei pointed out that in August 2022, the position cycle had already reflected that the market was too crowded. Yin Liyu, head of the credit bond management group and fund manager of Tianhong Fund, started from the monetary policy cycle and pointed out that the money market interest rate rose sharply at that time, but the market did not pay much attention to this matter, believing that it was a seasonal factor or other disturbance, and the country was still in the epidemic prevention and control, and most people believed that the interest rate would not increase too much. "But we saw that the exchange rate had already constrained monetary policy at that time, because the exchange rate depreciated rapidly to around 7.3, and the central bank's monetary policy was a multi-target system, focusing on China and taking overseas into consideration." Yin Liyu said.

When the signal conclusions of multiple cycles resonated, Tianhong Fixed Income Team continued to reduce its positions from August to October to avoid risks in advance.

The subsequent market correction was also in line with the prediction of the Tianhong fixed income team. Ren Ming said: "According to our experience, the amount of fund redemption is closely related to the performance of the asset side. When the yield of bank wealth management products is lower than that of money market funds, users' subscriptions begin to stop. When such products have negative daily performance for several consecutive days, more and more holders will redeem them when they find that the products are retreating. This redemption in turn exacerbates the market correction. After several superpositions, this effect will continue to amplify. It is this continuous negative feedback that led to the bond market volatility in the fourth quarter of 2022."

The third characteristic of Tianhong Five Cycles is that it uses highly quantified data to characterize the cycles, especially the lower three cycles, from which a steady stream of investment strategies are derived, making it convenient for fund managers to screen out specific strategy plans that match the duration and return drawdown requirements of the liability side.

For fund managers of Tianhong's fixed income team, the Tianhong Five-Cycle Model is not only a way of thinking to analyze the bond market, but also an inexhaustible library of practical tools. As mentioned above, building positions before insurance funds allocate large amounts of 30-year treasury bonds is a preemptive strategy; reducing positions in advance before the bond market fluctuates greatly in the fourth quarter of 2022 is a risk-averse strategy.

There are many such strategies. "Our team will continue to explore and study some interesting indicators in the market and share them with everyone in a timely manner. Everyone can develop their own new investment strategies based on this." Zhao Dinglong continued to add, "After the team has jointly portrayed the state of Tianhong's five cycles, everyone will also work together to find some resonant states and explore investment opportunities and investment strategies from the resonant states. Of course, for this resonant state, how much position to give and how much confidence to give, each fund manager has his own choice."

It is worth noting that since Tianhong Five Cycles uses hundreds of quantitative indicators to characterize the cycle status, it also helps fund managers to view and use various investment strategies more rationally and avoid human weaknesses. "I think it is difficult for me to become a person who is good at chasing ups and downs with my own subjective emotions. If there is no objective indicator constraint, I will often fall into internal friction. Relying on Tianhong Five Cycles to output this kind of investment strategy and implement it is a kind of reconciliation with myself." Zhao Dinglong said.

Incorporate time into your investment system

One of the most important functions in investment is time, but few people can really figure out how to incorporate time as a variable into the investment research system. However, the fixed income team of Tianhong Fund has done it.

Since this model distinguishes various influencing factors according to the time dimension, it also helps fund managers to better assist their specific investment decisions based on the different durations of the products they manage. The duration (time factor) of different products corresponds to completely different final investment decisions and portfolio construction.

What affects the short term are positions, emotions, and investor behavior; what affects the long term are macro factors. Incorporating the time factor into the investment system can help fund managers distinguish between long-term investments and short-term transactions, and find assets that fit their time dimension.

If the managed account has a short holding period and a smaller risk tolerance, more attention should be paid to the changes in the following three levels in the Tianhong Five-Cycle Model; if the managed account has a long holding period and short-term fluctuations can be ignored, more attention should be paid to the direction of the larger cycle.

Peng Wei admitted that he manages products that open daily on the liability side. The liabilities of such products fluctuate greatly, and it is difficult for users to accept large drawdowns. When making specific investments, we must look up at the sky (the big macro and monetary cycles) and also keep our feet on the ground (the underlying emotions, transactions, and behavioral cycles).

Zhao Dinglong said: "Different types of products have different requirements for product returns and drawdown control, which can be understood as different constraints. When formulating product strategies, it can be understood as solving multivariate constraint equations. We combine some existing investment strategies and put them into the system to run, generate estimated risk-return situations, and finally find strategies that meet the product risk-return requirements in constant adjustment. In terms of strategy selection, products with unstable liabilities and higher sensitivity, such as short-term bonds, generally use right-side trading strategies; products with relatively stable liabilities, such as fixed income + products, can use some left-side investment strategies."

In the portfolio management of Tianhong Fixed Income Team, assets are also divided into three categories based on the time factor: base position, base position +, and enhanced position, which are respectively for low frequency, medium frequency, and high frequency in the time dimension.

Low-frequency trading is the base asset, medium-frequency trading is the base + asset, and high-frequency trading is the enhanced asset. Based on the time dimension, the odds and winning rate characteristics of different assets in the portfolio are also different.

Through such a combination division, investors can also more clearly understand the sources of income, some of which are holding income and some of which are trading income.

More importantly, the Tianhong Fixed Income Team has incorporated its unique understanding of the fixed income business model into the process of using the time factor to differentiate assets and make investment decisions, namely, to make the risk-return characteristics of the product more in line with the needs of the liability side.

Win-win situation among individuals, platforms and holders

Ren Ming, who joined the Tianhong fixed income team in 2012, has personally witnessed the team's expansion from 5 people in the early days to more than 70 people today.

In the process of development, the investment paradigm in the fixed income field is also changing. There are more and more asset categories, investment returns are becoming more and more difficult to find, and customer needs are becoming more difficult to meet. It is in this era that the fixed income team of Tianhong Fund has gradually formed today's platform-based approach.

It is not easy to achieve a platform-based approach, and there are three main difficulties:

1) How to clarify the professional division of labor. The benefit of platformization is that it can gather everyone's wisdom and form team empowerment. This requires operation through professional division of labor. The basis of professional division of labor is to understand what everyone is good at and divide the steps of the entire investment process. In essence, it is a true understanding of investment research personnel and the investment process of various products.

2) How to achieve unity of the team's underlying thinking. A true team must have common organizational goals, common pursuits, and common values. If there is no unity of thought, then a group of people together will increase communication and friction costs, which will affect everyone's work efficiency and even cause internal friction. Investment is not a game of competing in numbers, and it is not easy to achieve team empowerment.

3) How to achieve a win-win balance between platform value and individual value. In the extreme mode of platform-based play, individuals will be "componentized". This is like a production line, and everyone is a worker on this production line. In this model, it is difficult for individuals to exert their creativity and value.

Under the formation of a unified team culture, the fixed income team of Tianhong Fund has built an open "Tianhong Five Cycles" model.This model does not turn fund managers into quantitative "screws". Instead, it breaks their blind spots in investment, allowing fund managers to focus more on their areas of expertise and maximize everyone's active investment capabilities. Through data-based communication methods, it can unify the communication perspectives of team investment and research personnel and achieve iterative growth of team members. In the end, both the platform and individuals of Tianhong Fund's fixed income team can achieve a win-win situation.

Of course, the most important thing is to achieve win-win results with the holders. In an era of falling interest rates, active investment capabilities in the fixed income field have become more important than ever. On the other hand, as more and more factors affect bond assets, fixed income investment has become more complicated than in the past.Through the systematic investment method developed over the years, Tianhong Fund's fixed income team has also brought better returns to holders.

The win-win situation among holders, asset management institutions and investment research personnel is the real value creation.

Risk Warning: The views are for reference only and do not constitute investment advice. Funds are risky and investment should be cautious. The fund's past performance does not represent future performance.

2024

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