Welcoming the second quarter: Are fund managers adopting a "defensive stance" or "going all out"?

Source: Shanghai Securities News Author: Chen Yue

At present, institutional investors are extremely eager to recapture excess returns, but the volatile market environment does not provide the kind of sense of security seen at the beginning of 2026.

The growth story is still being told again and again, but “Heavy Assets Low Obsolescence (HALO)” assets and the logic behind them always seem to be hinting at something. Some capital has started looking for a new margin of safety in defensive sectors. “Diversification does not bring excess returns—it only signals a stance of waiting.” A person in charge of equity investments at a large fund company in Shanghai told a reporter from Shanghai Securities News, “In the second quarter, the equity market will most likely send a clear signal, but in the current environment, all we can do is wait.”

“Win and Lose” and “Lose and Regain”

“Less than two months have passed since the beginning of the year, when actively managed equity fund net asset values surged sharply—but subjectively it feels like it happened a long time ago.” A top-performing fund manager at a certain mid-sized fund company in Shanghai said.

“Top-performing” means that, as of March 30, the cumulative unit net asset value growth rate of the fund managed by that manager over the past year is still above 50%, ranking in the top 20% among actively managed equity fund products across the entire market. But over the past month, the product’s drawdown has exceeded 10%. Yet he is still fortunate. According to Choice data, as of March 27, the past-year returns of all actively managed stock funds and equity-mixed funds have shrunk back to the level of early this year—this also implies that the excess returns of the vast majority of actively managed equity products have recently been severely eroded. “Everyone is back at the starting line again,” the fund manager said.

After experiencing the “win-and-lose” situation at the start of the year, “lose-and-regain” has become the top priority for fund managers in the second quarter. Has the market dropped to the point where it can “reclaim lost ground”? On this, CICC believes that the market decline is because the repricing of equity assets under pessimistic scenarios has not been sufficient. In a relatively optimistic scenario, as long as the Middle East geopolitical conflict does not continue into the second half of the year—causing the oil price mid-point to remain above $100—then assets that have priced in excessive pessimism, such as U.S. Treasuries and gold, have “reasonable cost-performance” for going long, and the downside pressure on equity assets will be alleviated. Conversely, if the situation evolves toward a more pessimistic scenario, with signs that it will further extend and affect real production activities, the market may quickly trade toward stagflation or even recession. In that case, an equity market that has underpriced risk broadly may face even greater pressure.

But in the eyes of institutional investors, the only assets that can quickly repair net asset values are still equity assets. Recently, Shanghai Securities News together with 天天基金 conducted a fund company research visit (referred to below as the “research”). Fund managers from multiple well-known fund companies, including 富国基金, 南方基金, 永赢基金, etc., participated in the vote. The research showed that the equity market remains the investment focus for fund managers in the second quarter. Regarding “which investment direction offers more opportunities for relative returns,” 93.75% of respondents chose the growth direction (highly aligned industry tracks and technology growth-type assets). The share of those who are optimistic about the HALO strategy (such as utilities, infrastructure, core resources, etc.) was 62.5%. For sub-industries, besides CPO and computing power, fund managers generally remain neutral.

“Defend for a Wave” and “Go All in”

As the market decline eases, strategy divergence is inevitable. Institutional investors who rebalance heavily for defense and add positions to bet on a rebound each have their own reasons. Overall, currently institutional investors’ optimism temporarily outweighs their concerns.

“The downside risk is very limited.” Li Yingzhen, the proposed fund manager for the泓德周期臻选 Mixed Fund (an initiated offering), said that in the second quarter the market may gradually shift from being driven by expectations toward a balanced stage of expectation plus fundamental validation, but attention should be paid to market volatility brought by geopolitical risks and policy changes. A fund manager at a certain mid-sized fund company in Shanghai also believes that from a long-term perspective, China’s assets remain highly attractive.

Even if the tone is optimistic, some allocation-oriented capital is still very “honest” in moving into defensive assets. A research report from 华泰证券 shows that from March 23 to March 27, the modelled fund positions showed a tendency to shift toward relatively defensive directions such as consumption and finance, indicating that capital has begun searching for a new margin of safety within defensive categories.

“Late April may be the decision-making point; before then, the portfolio should be as diversified as possible.” A person in charge of equity investments at a large fund company in Shanghai analyzed: First, the geopolitical situation is expected to become relatively clear by late April. Second, as the disclosure period for annual reports by A-share listed companies ends, earnings will bring new investment leads. “Whether to attack or withdraw—we are also waiting for a clear signal,” he said.

Some fund managers also seek returns from specific, more granular structures. “On the first day the Middle East geopolitical conflict happened, I reduced my position in the technology sector; in the following few days I added back everything.” A technology-focused fund manager at a mid-sized fund company in Shanghai said. The reason is that the asset pricing logic has completely changed: either it depends on a demand driver driven by non-linear breakthroughs (such as AI computing power), or it depends on supply constraints driven by rigid constraints (such as strategic resources). For any category with a large supply-demand gap, as long as the demand logic does not change, the price is likely to keep rising—“in the midst of huge differences, you have to dare to bet.”

“The AI Story” and “The Future of Oil”

Amid confusion and divergence, the market’s main theme still centers on AI and crude oil. In the view of institutional investors, these two categories of assets have started to move in tandem, and in more granular directions, institutions are “opening up new territory.”

Zheng Weishan, manager of 银河创新成长基金, said that the Middle East geopolitical conflict disrupted the supply of essential materials such as helium and bromine in the semiconductor manufacturing process, which will have a profound impact on the industrial chain going forward. “The impact on semiconductors shows a step-like transmission pattern: first raw materials, then energy, and then logistics. This will test the inventory and global allocation capabilities of relevant companies. This is a huge variable for the ongoing expansion of AI computing power. Helium shortages are directly linked to the output of advanced manufacturing processes, which could delay the next generation GPU from ramping up at a large scale.” Zheng Weishan said, but recent research visits found that high-performance processors and storage chips still face a shortage and remain in demand.

Jiahe Fund believes that in the second quarter, growth stocks may no longer be purely high-risk assets, but instead become a “hardcore hedging tool.” “AI may become a potential solution under conditions of large fluctuations in oil prices. Geopolitical uncertainty causing shipping disruptions and energy soaring is squeezing the gross margins of traditional manufacturing. At this time, the large-scale deployment of AI smart agents could replace high labor and management costs through automation, becoming a potential lever for companies to withstand stagflation risks and achieve cost reduction and efficiency gains,” Jiahe Fund said.

Beyond the two “storm centers” above, more narratives are extending across China’s A-share market—for example: the story of rising crude oil and a cyclical inflection point is being taken up by the chemical industry; the intersection of undervalued value and growth lies in innovative pharmaceuticals; the torch-passing from traditional energy is taken by lithium batteries—without hesitation; and the theme’s “stars and sea” is covered by commercial spaceflight. But around these narratives—such as express delivery, the bull cycle, fiber optics, and new consumption—these are “private territories” for some institutions. They aim to provide some excess returns for the portfolio through sufficient research depth and the degree of niche-ness, or also, in a certain sense, act as a “haven.”

(Editor: Wen Jing)

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