Last week, stocks and bonds of China Vanke Co., Ltd. (000002.SZ) experienced sharp declines due to widely known reasons.
A founder of a billion-yuan private fund reportedly issued an urgent apology on social media, stating, "We have adjusted the market valuation of certain extended assets today to prevent further drag on performance in the coming days, weeks, or longer. While this adjustment has nearly wiped out our investment gains since Q2, we believe it was the right decision."
Meanwhile, several bond funds also suffered significant losses between November 26 and November 28.
Data from Tonghuashun iFinD shows that Guolian Jinrui Shuangli Bond Fund saw the steepest drop, primarily due to a massive redemption on November 25, with most of the net value fluctuation occurring on November 26. Thus, its decline was likely unrelated to the China Vanke incident.
The second-worst performer, Huachen Wenjian Bond Fund, has drawn speculation for potential exposure to China Vanke bonds. The fund lost 1.77% on November 27 and 3.56% on November 28, effectively erasing nearly two years of accumulated returns. Given that China Vanke bonds collectively plummeted during this period, such speculation holds some merit.
Historical holdings reveal that Huachen Wenjian previously held bonds from Kangmei Pharmaceutical, a company embroiled in accounting fraud. However, its latest quarterly report shows only government bonds, each accounting for about 7% of the portfolio, offering no clear clues.
China Vanke bonds saw sharp declines on November 26 and 27, followed by a mixed performance on November 28, with some rebounding. If the fund manager adjusted holdings post-Q3 and diversified across different China Vanke bonds while actively trading, multiple scenarios could explain the losses. Further panic redemptions after the November 27 net value drop complicate the picture. Until the fund clarifies, speculation remains, though the possibility of a China Vanke bond hit cannot be ruled out.
**Are Primary Bond Funds Overloading on Convertibles?**
Other underperforming funds, however, appear unrelated to China Vanke bonds—yet their losses stem from even more glaring issues.
Jinying Yuanfeng Bond Fund, the third-worst performer, holds almost exclusively convertible bonds. Typically, convertibles balance "equity-like" and "bond-like" traits, with the latter providing downside protection. But current median prices around 130 yuan (average above 140) strip most bond-like safeguards, leaving them highly correlated with stocks.
For example, its top holding, Hangyu Convertible Bond (205.325 yuan on Sept. 30, 240.278 yuan recently), exemplifies this equity-like volatility, swinging over 10% in a single day. With a 5% portfolio weight, such moves could impact the fund’s net value by 0.5% daily—far riskier than conventional bond funds.
Other primary bond funds, including Minmetals Yinxiang, Jiangxin Huifu, Everbright B&D Medium-High Grade Bond, Great Wall Active Bond, and ChinaAMC Juli, also hold heavy convertible positions. Minmetals Yinxiang’s Q3 report shows convertibles exceeding the typical 20% cap for such funds, with the manager citing "increased risk appetite" and "active trading."
Comparing Q2 and Q3 reports, Minmetals Yinxiang’s non-convertible holdings dwindled from one government bond (<5%) to zero. Jiangxin Huifu, which avoided convertibles in H1, loaded up in Q3—missing earlier gains but catching the downturn.
**Where’s the Risk Control?**
While 2023’s strong A-share market boosted convertible-heavy funds, most explicitly label themselves "convertible bond funds" or benchmark against the CSI Convertible Bond Index. However, Minmetals Yinxiang and Jiangxin Huifu use benchmarks like the China Bond Composite Index and 3-month deposit rates—potentially misleading investors.
Fund firms should clarify risks via reclassification, benchmark adjustments, or warnings, yet their risk controls seem lax. Recent CSRC guidelines stress aligning benchmarks with fund strategies and ensuring stability through rigorous oversight.
In summary, while no bond funds were confirmed holding China Vanke bonds, several primary bond funds are effectively running equity-like risks via heavy convertible exposure. Investors should note that convertibles now behave like stocks, offering minimal downside protection. If market risks resurface, these funds could face outsized losses.
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