Mutual Funds: 3 Focuses to Boost New Quality Productivity Development

Mutual funds can promote technological innovation and drive the optimization of industrial structure and the transformation and upgrading of the economy by investing in new quality production forces. They should actively develop more fund products related to the science and technology innovation index system to provide better investment tools for investors.

Accelerating the development of new quality production forces is an intrinsic requirement for promoting high-quality economic development in China and accelerating the modernization in the Chinese context. It is also the core driving force for meeting the new round of global technological revolution and actively promoting the transformation and upgrading of China's economy and industry. Mutual funds, as important institutional investors, play an increasingly important role in the reform, development, and stability of China's financial system and capital market. In the future, mutual funds can serve technological innovation and emerging industries from three aspects to help the development of new quality production forces.

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Promoting the Development of Technological Innovation

The high-quality development of mutual funds is to enhance the ability to serve the real economy and national strategies.

Firstly, mutual funds can promote technological innovation by investing in the fields of new quality production forces, and drive the optimization of industrial structure and the transformation and upgrading of the economy. Taking the U.S. capital market as an example, through investment support for high-tech industries, the U.S. NASDAQ has attracted important global technology companies, including pharmaceuticals, biology, and the internet, and other high-tech fields. This has not only promoted technological innovation in the United States but also driven the transformation and upgrading of U.S. industries.

Mutual funds promote the development of China's technological innovation and the transformation and upgrading of industries by investing in industries related to new quality production forces. Taking the new quality production force index as an example, its industries are mainly distributed in TMT and high-end manufacturing. Mutual funds can promote the upgrading and transformation of traditional industries and accelerate the development of emerging industries through investing in related industries, thereby promoting the overall improvement of the industrial structure.

Secondly, as professional investors, mutual funds should base themselves on their professional research capabilities to accurately identify technology-based enterprises. Mutual funds should conduct in-depth research and continuous follow-up on the asset quality, growth value, and subsequent valuation of technological R&D output of listed technology companies. This provides relatively reasonable valuation and accurate pricing for technology-based enterprises, avoiding long-term price deviation from their value. It helps technology-based enterprises to grow and become stronger using the capital market, enhances the ability of the capital market to serve the real economy, strengthens the stability of the A-share market, enhances the price discovery function of the capital market, and guides capital to flow to new quality production force fields with market potential.

Providing Patient Capital Support

Technology-based enterprises related to new quality production forces often have high investment, long cycles, and high uncertainty in R&D and commercialization, which makes it relatively difficult for the technology industry, especially many new technology fields, to obtain indirect financing through traditional bank loans. Relying on the capital market for direct financing has become a more effective financing method.

On the one hand, mutual funds can help technology-based enterprises obtain the funds needed for growth by investing in them. With the construction of China's multi-level capital market system, especially the establishment of the Science and Technology Innovation Board and the Beijing Stock Exchange, a large number of technology-based enterprises have been supported to go public, expanding the financing channels for technology-based enterprises. As of the end of June 2024, more than 1,000 specialized and refined small and medium-sized enterprises have gone public on the A-share market, with more than 500 technology-based enterprises listed on the Science and Technology Innovation Board, focusing on new energy, biomedicine, and high-end equipment manufacturing fields, with an overall R&D investment exceeding 10%. Among them, national-level specialized and refined "little giants" account for 54% of the total number of companies listed on the Science and Technology Innovation Board. As of June 2024, the holding ratio of mutual funds in the Science and Technology Innovation Board is 9.76%, while the holding ratio in the Beijing Stock Exchange is only 0.10%. There is still a lot of room for mutual funds to participate in the investment of the Science and Technology Innovation Board and the Beijing Stock Exchange in the future.On the other hand, public mutual funds should actively practice the concept of long-term investment and value investment, and establish a sound long-term assessment mechanism for core employees such as management and fund managers. In particular, long-term investment performance of more than three years should be included in the performance assessment, while reducing the weight of indicators such as scale ranking, short-term performance, and income and profit. Efforts should be made to enhance the core capabilities of investment research in fund companies, strengthen research on technological innovation and core areas, and provide patient capital support for the long-cycle development of sci-tech innovation enterprises.

Especially, the implementation of long-cycle assessment by public mutual funds is more in line with the investment philosophy of medium and long-term funds, such as social security funds and pension funds, which can attract more medium and long-term funds to enter the market. Technological innovation, especially cutting-edge technological innovation, often requires long-term and stable basic research investment, and the investment return cycle is long, which determines that its financing model and risk model are similar to the financing model of infrastructure, and it needs more long-term capital and patient capital investment. According to the research by Lin Yifu and others, referring to the financing model of infrastructure, medium and long-term funds and other patient capital can enter the market by purchasing bond funds, stock funds, indices or ETFs and other public mutual fund products to support the development of technological innovation, thereby having a positive impact on the economy, which is conducive to the improvement of total factor productivity and the development of new quality productive forces.

Help investors share the dividends of development

The path of financial development with Chinese characteristics must adhere to the people-centered value orientation and build a capital market that is investor-oriented. Being investor-oriented means that a large number of investors can have returns and a sense of gain, and a large number of investors can share the dividends of the development of China's economic growth and new quality productive forces.

On the premise of controlling risks and effectively protecting investors, public mutual funds should continuously strengthen the research, application, and investment of the latest scientific and technological achievements, increase the innovation of fund products, and actively layout technology-themed fund products to improve active management capabilities and meet the needs of residents' daily increasing wealth management.

On the one hand, due to the longer development cycle and higher risk of failure in technological innovation, ordinary investors need to bear higher investment risks if they invest in technology companies directly, and the investment threshold is relatively high. For example, according to the Shanghai Stock Exchange's requirements for individual investors to participate in the investment of the Science and Technology Innovation Board, they need to have at least two years of securities investment experience and an average of no less than 500,000 yuan in securities account assets. Individual investors also need to meet the threshold of two years of securities investment experience and 500,000 yuan when investing in the Beijing Stock Exchange. According to the data disclosed by the China Securities Depository and Clearing Corporation (as of the end of 2015), 93% of natural person investors do not meet the account opening conditions for the Science and Technology Innovation Board and the Beijing Stock Exchange. Especially after several years of bear market, the market value held by investors has also decreased. So far, the proportion of investors with a holding market value of less than 500,000 yuan has reached as high as 96%.

If ordinary investors invest in the Science and Technology Innovation Board and the Beijing Stock Exchange through public mutual funds, the investment threshold will be greatly reduced, and investment risks can be diversified through public mutual funds. The minimum investment amount for the first batch of approved Science and Technology Innovation Board-themed and Beijing Stock Exchange-themed public mutual funds only needs to start from 1 yuan, which allows more ordinary investors to participate in sharing the growth dividends of sci-tech companies.

On the other hand, public mutual funds should increase product innovation efforts, actively develop more theme funds, ETFs, ESG and other fund products related to the technological innovation index system, and provide better investment tools for institutional investors and medium and long-term funds to enter the market, such as ETF products. Although the capital market has performed averagely in recent years, the ETF market has grown against the market and has been recognized by more institutional investors. In particular, technology-themed ETF products have attracted more investor attention. As of the second quarter of 2024, the scale of the Science and Technology Innovation Board ETF has reached 176.3 billion yuan, which is six times the scale at the end of 2020.