As the first three quarters of the year wrap up, domestic A-shares and Hong Kong stocks have experienced repeated fluctuations, while the bond market has shown a generally firm yet range-bound trend amid multiple intersecting factors. With the Federal Reserve's decision now behind us, a key question emerges: as we look toward the fourth quarter, does the style mix within equities need rebalancing? Which fund styles may gain an edge? What thematic funds deserve attention? And how should investors approach broad asset allocation to smooth portfolio volatility?
To address these questions, four prominent public fund-of-funds (FOF) investors share their outlooks on fourth-quarter asset allocation strategy. They are Ren Zheng, General Manager Assistant and Fund Manager at Wanjia Fund; Zheng Ke, Chief Asset Allocation Officer at Pengyang Fund; Duan Weiliang, Fund Manager of the Yongying Yuanwen Steady Multi-Asset 90-Day Holding Mixed (FOF) Fund; and Dai Hongkun, FOF Fund Manager at Minsheng Jiayin Fund.
Here are their key takeaways: Ren Zheng expects equity styles to become more balanced in the fourth quarter, with the market likely moving away from the growth-dominated trend of the first half toward a scenario where both value and growth styles coexist. Opportunities should emerge across value/dividend, balanced, cyclical, and technology style funds. Zheng Ke believes that in the fourth quarter, stocks will outperform bonds, requiring style rebalancing, with crude oil and domestic new quality productive forces deserving particular attention. Duan Weiliang notes that the probability of a repeat of the first half's growth-led rally has declined; he suggests a moderate shift in focus from highly concentrated hard tech toward balanced or value styles, potentially adopting a barbell approach in allocation. Dai Hongkun, meanwhile, will prioritize gold in FOF portfolios among gold, crude oil, and REITs, while keeping a close watch on A-shares, credit bonds, and long-duration rates.
Positive Outlook for Stocks and Bonds in Q4
On the investment value of stocks versus bonds given the current backdrop, Ren Zheng points out that since July, the equity market has seen sustained corrections, with early high-beta growth sectors experiencing notable pullbacks. Growth sectors that performed strongly in the first half have been digesting valuation pressure, and trading congestion has eased significantly. On the bond side, long-end rates have performed firmly over the first three quarters, yielding both carry and capital gains. However, the problem now is that absolute yields have reached historically low levels, making the market more sensitive to external shocks, risk appetite shifts, and expectations of stability-driven growth recovery. Bond attractiveness has declined relative to the first three quarters. By the stock-bond valuation ratio, the comparative advantage of equities over bonds has continued to rise since July, with the equity risk premium (ERP) sitting at an upper-middle position between historical averages and one positive standard deviation. The TTM dividend yield of the Wind All-A shares index stands at 1.77%, making equities more compelling than bonds from an allocation perspective.
Zheng Ke emphasizes that from a cross-asset comparison, stocks remain more attractively valued than bonds. After two and a half years of a bull market in A-shares, the equity risk premium still remains relatively elevated at above 4%, while bond yields hover just above 1%. This implies that, on a valuation basis, stocks still hold appeal relative to bonds. More importantly, this indirectly signals that over a 15-20 year cycle, the substantive slow bull market represented by new quality productive forces has not yet concluded. In the bond market, while the overall trend is firm yet range-bound, the low-interest-rate environment resulting from growth slowdown has made various bond strategies less efficient to research. Fixed income assets currently offer more allocation value than a source of excess returns. For Q4, his view is that stocks outperform bonds, but internal equity structure differentiation will be pronounced. The key to allocation lies not in simply increasing positions but in structural rebalancing.
Duan Weiliang notes that within his stock-bond attractiveness framework, the current ERP sits near negative one standard deviation, suggesting equities do not yet hold a clear valuation advantage over bonds. For bonds, domestic demand remains weak, inflation pressures are mild, and monetary policy maintains a moderately loose stance, leaving room for a modest downward shift in the interest rate center. Yet, with policy rate spreads already at low levels, further downside is limited. The bond market will likely remain range-bound with an upward bias, characterized by a capped top and a supported bottom. Over a medium-term horizon, equity assets may offer relatively more opportunities, with potential upside contributed by the equity segment. However, overseas liquidity disruptions may keep the market in a state of volatility and indecision. Bonds are suitable as a core holding and hedging tool, relying on carry returns while maintaining duration management. For stability-focused portfolios, a balanced stock-bond approach is more appropriate, gradually increasing equity exposure during market volatility windows to capture upside without making one-sided bets on a single asset class.
Dai Hongkun holds a positive view on both stocks and bonds in the fourth quarter, expecting both asset classes to trend upward amid fluctuations. Relatively speaking, stocks offer better value. In Q4, equities are likely to sustain an upward, volatile path, buoyed by loose domestic liquidity, optimized capital structures, resolution of external disturbance factors, and continued sentiment repair. Structural opportunities may concentrate in hardcore technology with delivered earnings, low-valuation consumption, and high-dividend sectors. Similarly, against the backdrop of ample liquidity, fully hedged supply shocks, and continued institutional participation, the bond market is likely to maintain an upward, fluctuating trajectory, with the 10-year government bond yield potentially declining further.
Expected Shift Toward Balanced Equity Styles in Q4
Addressing whether internal equity styles require rebalancing in Q4 and which fund styles may outperform, Zheng Ke states that rebalancing is necessary. While the overall equity risk premium remains above 4%, structural contradictions are severe. Since the second half of last year, risk premiums in some strong sectors have repeatedly touched two standard deviations below the mean, with valuations and trading congestion reaching historical extremes. Notably, directions like the overseas computing power mapping chain may already show signs of transitioning from bull to bear. Combined with the China-US strategic stalemate and the trajectory of the US Treasury system, he believes there is a high probability that the overseas AI bubble will burst within a relatively short period. Meanwhile, many domestic new quality productive force sectors appear attractively valued on a long-term basis, including brokers, non-ferrous metals, utilities, home appliances, media, domestic tech supply chains, and mass consumer goods. After sufficient policy-economy interplay, the market is likely to undergo style conversion in the coming period. Q4 equity style funds may rebalance from extreme growth toward balanced, value, dividend, domestic demand, and domestic tech self-reliance directions. Thematically, he suggests focusing on domestic AI applications, new quality productive forces, resource products, brokers, and mass consumption.
Duan Weiliang observes that the Fed's rate cut has reshaped global capital market expectations for dollar liquidity. With the market still pricing in another cut within the year, risk appetite for tech sectors may decline, and investors will further raise demands on earnings certainty. Looking ahead, the probability of a repeat of the first half's growth-dominated rally has decreased. On style, attention should shift from highly concentrated hard tech toward balanced or value directions. A barbell allocation approach may be appropriate: on one side, value and dividend assets, and on the other, AI sectors with strong earnings certainty. This combination might better suit the current market environment of gradual style rotation.
Ren Zheng believes that after the Fed's rate cut, A-share pricing may shift from overseas policies and liquidity back to industry prosperity and earnings fundamentals. However, even with the cut partially priced in, the Fed's hawkish tone still pressures long-duration asset valuations. He expects equity styles to become more balanced in Q4, with the market likely moving away from a single growth-style dominance to a scenario where value and growth coexist. Opportunities exist across value/dividend, balanced, cyclical, and technology style funds. On thematic funds, he highlights four areas: first, AI industry prosperity retains resilience, and with accelerated semiconductor localization, internal tech sector differentiation may occur; he advises focusing on actively managed funds with significant alpha in tech. Second, cyclical sector earnings may see marginal recovery, allowing attention to upstream raw materials and midstream manufacturing funds that have lagged and remain at low valuations. Third, export chain prosperity certainty is high, with thematic funds in grid equipment, engineering machinery, ships, and home appliances worth watching. Fourth, dividend and high-yield thematic funds still show potential for absolute returns and can serve to hedge market volatility.
Dai Hongkun expects growth and value style funds to perform relatively evenly in Q4. With the Fed's 25-basis-point rate cut in September and lingering expectations of further cuts within the year, elevated long-end US Treasury yields continue to pressure discounted cash flows of longer-duration assets, constraining growth valuations. In contrast, value assets with shorter duration and strong cash flows fit the current environment and may become a focus for capital allocation. However, considering the significant correction growth-style funds underwent in Q3 over roughly a quarter, growth funds may see some degree of recovery in Q4. Thematic funds should focus on hardcore technology delivering earnings, low-valuation consumption, and high-dividend sectors.
Focus on Commodity ETFs Like Gold, Energy, and Chemicals
When asked how the Fed's rate cut impacts various asset classes and whether gold, crude oil, and REITs are worth considering in FOF portfolios, Duan Weiliang notes that after the cut, overseas risk assets rebounded as uncertainty eased, but with expectations of further cuts, equity allocations should not be overly aggressive. Gold benefits from central bank purchases and the long-term logic of a weakening dollar, making it suitable as a portfolio cornerstone. Crude oil is also noteworthy, as future Fed action highly depends on inflation performance, and oil is a core inflation variable, serving as a hedge against further Fed cuts.
Ren Zheng says his multi-asset FOF portfolios include commodity ETFs spanning gold, energy, chemicals, and non-ferrous metals. For gold, the September rate cut partially cleared negative factors, but a hawkish dot plot and US-Iran tensions still cap price gains. Given the lack of basis for sustained aggressive Fed cuts, the long-term support from central bank purchases and dollar credit weakening remains intact, so he believes the gold bull market is not over. Crude oil is harder to call and is better positioned as a hedge asset. Based on fundamental research, he expects soymeal prices to rise moderately in Q4. Among non-ferrous metals, he is relatively bullish on copper, with the core risk being changes in US refined copper tariff policy.
Zheng Ke argues that due to US economic structure, Fed rate cuts are unlikely to form a trend. Combined with the trajectory of the US debt system, rate cuts will struggle to truly curb inflation. Dollar-denominated gold retains long-term upside momentum due to renminbi undervaluation. However, during a period of gradual renminbi appreciation, the allocation value of renminbi-denominated gold diminishes significantly, with substantial opportunity costs. For domestic REITs, the underlying assets lack commercial real estate and residential projects, making alpha generation difficult, and with extremely limited liquidity, they struggle to show allocation value in broad asset allocation frameworks. Therefore, he prefers allocating to crude oil and strategic resources, as well as high-quality domestic equity assets rather than gold. He would maintain a strategic core holding in gold, but the opportunity cost of renminbi gold prices warrants serious consideration. His stance on REITs remains cautious.
Dai Hongkun explains that since the Fed's cut aligned with market expectations, its impact on various assets was relatively muted. It places some short-term pressure on US equities but won't end long-term structural trends. Gold saw a quick short-term pullback after the cut, yet supported by multiple factors, its medium-to-long-term upward logic remains intact. The cut's short-term impact on crude oil is also limited, with subsequent trends driven more by supply-demand dynamics. For A-shares, the marginal shock diminishes as the cut was fully anticipated; coupled with the independence of domestic policy, the actual impact is very limited. In FOF portfolios, he will prioritize gold among gold, crude oil, and REITs, while continuing to monitor A-shares, credit bonds, and long-duration rates.
Reducing Portfolio Volatility Through Diversification
On how FOF products can construct broad asset allocation to reduce portfolio volatility amid heightened market swings, Ren Zheng suggests several approaches. First, assess multi-dimensional macro risks and build a diversified portfolio based on multi-scenario asset performance to weaken exposure to any single macro environment. Second, allocate to low-correlation assets to reduce single-beta exposure and minimize synchronized ups and downs. Third, employ target volatility and risk budget mechanisms with regular rebalancing; when market volatility rises, trim high-risk asset budgets to constrain portfolio swings.
Zheng Ke emphasizes that within the public fund system, FOFs have a distinct advantage in asset allocation due to country and asset diversification. But the true vitality of FOF lies in the asset allocation framework behind it. Through risk budgeting, drawdown target management, diversification across low-correlation assets, dynamic rebalancing, and holding period design, his team seeks to reduce portfolio volatility and improve investor experience. A China-specific asset allocation framework is particularly important. Given China's asset accessibility, leverage availability, and retail-dominated equity market characteristics, achieving effective cross-cycle asset allocation under domestic conditions is especially challenging.
Duan Weiliang underscores adherence to a diversified-plus-risk-budget multi-asset approach, avoiding bets on a single sector or asset class. In practice, using risk parity as the underlying framework, risk is evenly distributed across low-correlation assets such as A-shares, Hong Kong stocks, US stocks, bonds, gold, and crude oil to lower portfolio volatility through diversification. Internally within equities, style and strategy diversification reduces crowding risk in any single style. Additionally, over the coming months, attention should focus on changes in dollar liquidity expectations, which will affect many risk assets. In short, relying on low-correlation diversification as a foundation, using risk parity to manage volatility, and layering multi-strategy and dynamic rebalancing to enhance returns forms the main path for FOF portfolios to reduce volatility in an environment of heightened market fluctuations.
Dai Hongkun focuses on three key aspects: first, diversity across major asset classes to avoid excessive concentration in any single asset; second, diversity in internal styles within each asset class to prevent over-concentration in one style; third, ensuring relatively balanced risk exposure across assets, avoiding severe imbalance across different asset classes.
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