Guideline to lift role of MF benchmarks

China's securities regulator has set a regulatory framework to strengthen the role of performance benchmarks in regulating mutual fund investments, a milestone move to enhance the industry's investment performance and attract more long-term investments, officials and experts said.

Informed sources told China Daily that the rollout of relevant measures will proceed steadily and prudently, with a transition period of about one year to ensure existing products adjust their benchmarks smoothly if necessary. Fund managers will be encouraged to fine-tune benchmarks where needed, rather than make large-scale portfolio shifts.

Widely used in overseas markets yet less developed in China, performance benchmarks — typically stock or bond indexes — are the standards set by fund management companies to reflect a mutual fund's investment style, ensure that investment behavior aligns with the designated style, and evaluate fund performance.

On Friday, the China Securities Regulatory Commission released a guideline on enhancing the role of performance benchmarks in regulating mutual fund investment, setting out requirements for selecting and using the benchmarks, placing primary responsibility on fund managers and clarifying the roles of custodians and distributors.

The guideline, accompanied by an operational rule book released by the Asset Management Association of China, requires performance benchmarks to reflect a fund's positioning and style, which should not be changed arbitrarily, including due to manager turnover, short-term market swings, or performance assessments and rankings.

The CSRC said the guideline is aimed at ensuring benchmarks effectively reflect a product's investment style and urging fund management companies to improve internal controls, with the ultimate goal of better protecting investors' legitimate rights and interests.

Prior to the guideline, there was a lack of specialized and systematic rules for performance benchmarks in China, leading to significant deviations in some actively managed, equity-focused funds with their benchmarks, which have negatively impacted investor returns.

Effective from March, the guideline has formed a comprehensive oversight framework surrounding performance benchmarks and filled a long-standing regulatory gap, experts said, helping promote a more standardized fund industry development, improve investor returns and attract long-term capital into the market.

A spokesperson for China Asset Management, a domestic mutual fund management company, said the guideline marks "an important milestone" in the mutual fund industry's high-quality development.

"Putting investor interests at the core, the guideline directly targets long-standing pain points of investment style deviation, helping investors see more clearly what they are buying and hold with greater confidence, thereby improving the investing experience and sense of gain," the spokesperson said.

The spokesperson added that more standardized benchmark requirements will make fund positioning more precise and differentiated, while linking benchmarks more closely with fund managers' compensation will strengthen the alignment of interests between managers and investors and keep them focused on delivering long-term returns.

The guideline has called on fund management companies to evaluate their teams based on investment returns. Managers of actively-managed, equity-focused funds whose long-term performance significantly lags behind their benchmarks will see a marked reduction in performance-based pay.

The Asset Management Association of China will soon refine its compensation assessment rules and spell out detailed requirements for the pay reform.

This aligns with an action plan released by the CSRC last year to foster high-quality development of the mutual fund industry. According to the plan, managers whose over-three-year results fall more than 10 percentage points below the benchmark would see a notable cut in performance-based compensation, while those who outperform significantly may receive appropriate rewards.