Quantitative Models and Construction 1. Model Name: CSI 500 Index Enhanced Strategy - **Model Construction Idea**: The model aims to enhance the performance of the CSI 500 Index by leveraging quantitative investment strategies, focusing on stock selection within the index constituents to generate alpha while maintaining tight tracking to the benchmark index [3][48][76] - **Model Construction Process**: 1. **Index Composition**: The CSI 500 Index is constructed by excluding the top 300 largest stocks by market capitalization and selecting the next 500 largest stocks from the remaining universe of A-shares [43][44][45] 2. **Quantitative Stock Selection**: The enhanced strategy focuses on selecting stocks with high profitability, high growth, and small market capitalization within the CSI 500 Index constituents [68][73] 3. **Risk Control**: The fund aims to control tracking error by ensuring the daily tracking deviation does not exceed 0.5% and annualized tracking error remains below 8% [57][76] 4. **Periodic Adjustments**: The index constituents are adjusted semi-annually, and the fund rebalances accordingly to maintain alignment with the benchmark [46] - **Model Evaluation**: The strategy demonstrates strong alpha generation capabilities, primarily driven by superior stock selection rather than sector or style deviations [73] --- Model Backtesting Results CSI 500 Index Enhanced Strategy - **Annualized Return**: 9.32% for the fund, compared to 0.82% for the CSI 500 Index benchmark [48][49] - **Annualized Information Ratio (IR)**: 2.26, significantly higher than peers [48][62] - **Annualized Tracking Error**: 3.87%, indicating tight tracking to the benchmark [57][62] - **Maximum Drawdown**: 22.46% for the fund, compared to 28.77% for the benchmark [49] - **Monthly Excess Return Win Rate**: 76.92%, showcasing consistent outperformance [61] --- Quantitative Factors and Construction 1. Factor Name: Profitability, Growth, and Size - **Factor Construction Idea**: The fund emphasizes stocks with high profitability, high growth potential, and smaller market capitalization to achieve superior returns [68] - **Factor Construction Process**: 1. **Profitability**: Stocks with higher return on equity (ROE) and net profit margins are overweighted [68] 2. **Growth**: Stocks with higher earnings growth rates are prioritized [68] 3. **Size**: Smaller market capitalization stocks are preferred, as they tend to offer higher alpha potential [68] - **Factor Evaluation**: The fund's factor exposures align with its active management strategy, contributing to its alpha generation [68][73] --- Factor Backtesting Results Profitability, Growth, and Size Factors - **Alpha Contribution**: The fund's alpha is primarily attributed to its stock selection within the CSI 500 Index constituents, with a high "CSI 500 constituent stock ratio" of over 90% [73][75] - **Sector Allocation Impact**: Minimal sector deviations, with the fund closely mirroring the sector weights of the CSI 500 Index while achieving excess returns through stock selection [71][72]

Core Viewpoint - The rapid development of passive investment in China is reshaping the ecosystem of active and passive investment in the public fund industry, especially as active stock products struggle to outperform indices. The article explores the impact of passive investment on the market and the active management industry, providing insights and analyses on several core issues [1]. Group 1: Trends in Passive Investment - The domestic passive investment market has flourished since 2010, with the number of passive stock products increasing from fewer than 10 to over 2,000. By the end of Q4 2024, the scale of passive stock products reached 3.54 trillion yuan, a year-on-year growth of 241% [3][10]. - In the U.S., passive investment has matured, with passive stock products accounting for 61% of all stock products by Q4 2024, and total passive product scale reaching 16.2 trillion USD [15][18]. Group 2: Reasons for the Rise of Index Investment - The emergence of index investment is driven by the differences in active investment capabilities and investor awareness. Factors include the zero-sum nature of alpha returns, differences in investor abilities, and the realization by weaker investors of their disadvantages in alpha competition [4][29]. - The cost-effectiveness of passive investment compared to active management has led many investors, especially individuals, to shift towards index investment [32]. Group 3: Impact of Passive Investment on Active Management - The increasing scale of passive investment raises questions about the necessity of active management. However, the conclusion is that active management is needed more than ever, as passive investment sacrifices alpha pricing efficiency while enhancing beta pricing efficiency [5][41]. - As passive investment grows, the demand for effective alpha pricing from active management increases, creating a dynamic balance between active and passive investment [45][46]. Group 4: Evolution of Active Management Industry - The rise of passive investment necessitates that active managers demonstrate their ability to generate excess returns, leading to a greater emphasis on performance benchmarks. Investors will likely compare active funds against clear performance standards [58][59]. - The competitive landscape for active managers will become more transparent, making it easier for investors to identify high-performing funds and leading to a clearer distinction between successful and unsuccessful products [62][68].