As we approach 2024, the global financial landscape faces increased volatility, yet a distinctive financial product known as Fund of Funds (FOF) is emerging with formidable resilience against risksBy December 20, a remarkable trend has surfaced: 38 publicly offered FOFs have achieved an annual return exceeding 10%, showcasing their potential in turbulent markets.

Often referred to as "fund pickers," FOFs are adapting their asset allocations in response to significant market fluctuationsA key strategy has involved elevating the proportion of Exchange-Traded Funds (ETFs) within their portfoliosThese passive investment tools allow fund managers to navigate the market flexibly, improving their overall performanceLooking ahead to 2025, several fund managers anticipate an ongoing refinement of asset allocations, with a particular focus on value dividends and growth styles, leveraging a variety of tools, including ETFs, to seize market opportunities and foster sustainable growth and excess returns.

In this context of market flux, it's essential to examine the insights from various FOF managers as they reflect on the past year's performance

With the end of the year nearing, their experiences reveal the significant advantages of FOFs in product design during tumultuous times.

Sang Lei, the head of the FOF strategy group at China Europe Fund Management, noted that leading up to mid-September, major global asset classes mirrored the prevailing market expectationsFor instance, domestic bond yields were declining while dividend stocks in the A-share market, along with sectors like artificial intelligence closely tied to U.Smarkets, performed robustlyThis extreme diversification across styles and sectors created a feedback loop that amplified negative market conditions, only easing in late September.

In such a clearly differentiated market environment, fund managers face a challenging dichotomy: to maintain a long-term investment value perspective or to chase short-term market trendsSang further elaborates that the current market climate presents two significant challenges for long-term investment strategies

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The first is a dearth of investment opportunities, and the second pertains to the rapid shifts in sector and style configurationsThese variances can result in notable discrepancies in the investment behaviors of fund managers, complicating the tasks of fund research and style allocation.

Li Wenliang, general manager of the FOF investment department at Southern Fund, highlighted that while 2024 may usher in a simultaneous rise in global equities and bonds, single assets still exhibit notable short-term volatilityThis scenario accentuates the allure of the multi-asset, multi-strategy configuration model inherent to FOFsBy integrating global stocks, bonds, commodities, and alternative strategies, many FOFs have effectively curtailed short-term fluctuations in their portfolio net value.

Investment manager Jiang Hong from Invesco Great Wall Fund reinforced that the diversification strategies employed by most FOFs have markedly improved their risk management, leading to significant retrenchment in portfolio drawdowns

Numerous FOF products have gone beyond traditional equity-bond pairings, enthusiastically investing in commodity ETFs and Qualified Domestic Institutional Investor (QDII) products, greatly benefiting overall portfolio performance.

A key component of the successful strategy has been the increased emphasis on ETF allocationsSang Lei communicated this trend to reporters, indicating that ETFs now represent a considerable part of his investment mixThe spectrum includes bond ETFs, broad-based stock ETFs, industry-specific stock ETFs, commodity ETFs, and overseas stock ETFs, all of which are contemplated in his team's investment strategy.

From a long-term viewpoint, with underlying market conditions that may not favor active funds in terms of generating excess returns, Sang believes that raising the allocation of ETFs within his managed FOF is prudentShould an active fund struggle to achieve excess returns against its benchmark or maintain a short holding period, ETFs would increasingly become his primary selection.

Li also pointed out that as China's capital markets evolve and mature, the influence of institutional investors grows, and domestic asset pricing effectiveness improves

This evolution makes it progressively challenging to secure excess returns through active stock selectionThus, increasing the allocation of equity index ETFs within FOF portfolios aligns with a prudent long-term direction.

He also mentioned that in periods when credit spreads are relatively low, bond index ETFs emerge as appropriate investment toolsAdditionally, due to the complexities surrounding cross-border asset allocation, fund managers are inclined to utilize passive index ETFs to capture foreign market long-term beta returns, expecting a gradual increase in the central allocation of passive index ETFs within the FOF industry.

Jiang echoed these sentiments, noting that her FOF team has consistently raised ETF allocations over recent years, particularly within large asset classes and through sector rotations using these passive investment vehiclesThey also enhance diversification with commodity ETFs and QDII ETFs to minimize portfolio volatility.

Today, ETFs hold a significant share of market participants' asset allocations, establishing themselves as vital instruments

Looking forward to next year, Jiang expressed commitment to not only maintaining but aggressively increasing ETF allocation, while simultaneously seeking active fund managers capable of generating excess returns.

As these fund managers contemplate future market movements, insights emerge regarding investment strategiesSang remains optimistic about the investment value within the A-share marketSince late September, confidence has been steadily reinstated, suggesting that factors influencing the A-share market currently pivot more towards structural and sentiment aspects rather than macroeconomic considerationsDespite witnessing rapid short-term growth, prevailing valuations still seem attractive for investorsIf sectors boasting a global competitive edge within the A-share market persist in gaining confidence from both domestic and international investors, a protracted bullish trend may well unfold, creating a beneficial cycle.

Similarly, Li concurs that bolstered domestic growth policies and positive capital market regulations are increasingly validating the allocation value of domestic equity assets

Even though economic recovery requires further confirmation, the cost-effectiveness of equity assets compared to fixed income persists at historically lofty levels.

In terms of relative return perspectives, future strategies should prioritize equity asset allocation, particularly as the fourth quarter heralds a valuation correction trendLi noted that even if the U.Seconomy continues to exhibit resilience and monetary policy remains tight, opportunities in long-duration bonds might be scant; however, short-duration debt securities still offer appealing yieldsIf global economic recovery becomes more steadfast, sectors such as non-ferrous metals and commodities, long undervalued due to insufficient capacity investments, could present opportunities for phased price corrections.

Lastly, Jiang expressed an optimistic outlook for the 2025 market, identifying that both value dividend and growth styles seem poised for substantial performance