You cannot succeed by "horse racing" product development. Allianz Fund CEO Zheng Yuchen: How should foreign public fund managers win?

Cailian Press, March 14 — (Reporter Wu Yuqi) As competition in the public fund industry becomes increasingly refined, how foreign fund companies find their positioning has become a focus of industry attention.

Allianz Global Investors General Manager and Chief Investment Officer Zheng Yuchen said in an interview that Allianz does not aim to be just a fund company that sells products, but rather as a “solution provider instead of selling product.”

In his view, compared to outstanding performance in a single product at a certain stage, it is more important to manage clients’ money properly in the right way. Therefore, Allianz does not agree with the “horse race” approach of simply launching products. Zheng emphasized that product issuance is not just about increasing quantity or racing in different tracks, but about being responsible to the clients behind each product. For a fund company, what truly matters is not how fast products are developed, but whether the product line has long-term vitality and can continuously meet client needs across different market environments.

Zheng also provided a broader outlook on the development of the asset management industry. Looking ahead, he believes there are four major trends: first, standardization, as some previously immature practices will gradually be phased out; second, competition for excess returns will intensify, requiring fund companies to build a competitive moat at the corporate level; third, market participants will become more institutionalized and professional; fourth, the capital market will become more internationalized.

From Investment Goals to Performance Attribution, Forming a Complete Closed Loop

Zheng believes that rule-based active investing first needs to address the issue of investment philosophy. Allianz has set a relatively clear goal for this system: to generate long-term, significant, and sustainable risk-adjusted returns for clients.

He thinks the core value of active management still lies in creating excess returns, but these should not be just short-term results; they should be explainable, predictable, and sustainable. Allianz summarizes this goal as “EPS,” corresponding to the keywords Explainable, Predictable, and Sustainable.

Based on this philosophy, Allianz prefers to rely on team collaboration and investment processes to build a more replicable research system, rather than over-relying on individual experience and on-the-spot performance. Zheng used the analogy of “industrial products” versus “artworks.” He believes that while artworks have their unique value, they are often difficult to replicate; in contrast, industrial products better meet the institutional investment requirements for stability and consistency.

Beyond investment philosophy, the second step is to define investment objectives more objectively and clearly. According to Allianz, different product types have different goals, so evaluation metrics and management methods need further refinement. For relative return products, the team emphasizes striving for higher excess returns with minimal tracking error, essentially maximizing the information ratio.

When discussing this, Zheng pointed out that some overseas quantitative products focus heavily on the stability of excess returns and strict control of tracking error, but the magnitude of excess returns is often not large. While their information ratios may be high, they may not meet some investors’ actual expectations for excess returns. Allianz believes that the management goal of relative return products is not to simply lower risk exposure, but to seek more significant excess returns while maintaining reasonable tracking error. In other words, it’s not about taking less risk, but about taking the right risk.

For total return products, Allianz adopts a different approach. They focus on achieving higher returns above the risk-free rate at a lower total risk level, aiming for a higher Sharpe ratio. As a result, the core metrics applicable to products differ based on investment objectives.

Zheng mentioned that the market often evaluates funds using multiple metrics simultaneously, trying to apply a single standard to different types of products. However, he believes this approach may not be accurate. For example, both the information ratio and Sharpe ratio are used to evaluate the same fund, but for relative return products, the Sharpe ratio may not be the most important indicator.

The reason is that the Sharpe ratio is influenced by product design features and market phases. For instance, growth funds and value funds naturally exhibit different volatility and return characteristics in different market environments; bond funds are similar—short-term bond funds may naturally have higher Sharpe ratios than long-term bond funds in certain phases. Comparing metrics without considering product positioning often fails to truly reflect management effectiveness.

The third layer involves the specific implementation of the investment process. Zheng emphasized that this is not just about listing operational steps but about a complete chain that includes opportunity identification, embedding risk constraints, proactive risk management, and post-investment review and correction.

In capturing investment opportunities, Allianz emphasizes a systematic approach to find sources of sustainable excess returns. Zheng said the team aims to combine bottom-up deep research with the PB-ROE stock selection framework to identify mispriced assets, improve ROE, or target stocks with sustainable high ROE. He hopes that opportunities come from a stable systematic framework rather than random factors. Systematic screening enhances efficiency and stability, but must be combined with in-depth fundamental analysis to exclude flawed targets, ultimately forming a high-conviction pool.

Beyond opportunity identification, risk budgeting models are embedded throughout the investment process. Zheng mentioned that Allianz requires fund managers to sign an investment authorization letter for each product issued. This includes typical investment limits and permissions, as well as risk indicators such as maximum tracking error, total risk levels, industry deviation monitoring, liquidity requirements, etc.

This extends to pre-emptive active risk management. Allianz’s risk budgeting models and tools are integrated into every step of the investment process.

Post-investment, Allianz continuously reviews performance, including attribution and correction. They monitor risk characteristics of fund portfolios and deviations from investment guidelines. This includes pre-trade risk exposure calculations. If a portfolio deviates significantly—such as industry deviation—the fund manager must provide a written explanation promptly. As CIO, Zheng can also view each fund’s risk exposure daily through internal systems. Under this framework, the investment process does not end at buying and selling but forms a closed loop from opportunity recognition, risk constraints, to post-investment attribution and dynamic correction.

Not Engaging in “Horse Race” Product Launches, but Responsible for Each Client Behind the Product

If the previous content explains how rule-based active investing operates, at the company management level, Zheng is more focused on the alignment between products and client needs.

As a foreign fund company, Allianz places great importance on each product lineup, aiming to develop long-term, sustainable product lines. Zheng believes that some short-term successful track-based products may not have lasting vitality. As market hot spots shift, tools with strong beta characteristics are hard for holders to grasp long-term. Moreover, success in hot tracks often involves many random factors.

At Allianz, products are not launched in a “horse race” manner but with responsibility to the clients behind each product. Zheng believes that quantity does not mean better; each product should be crafted with an industrialized approach to high quality.

This philosophy aligns with the core idea of rule-based active investing. For Allianz, standardization is not just about discipline in research but also about product design serving long-term, clear, and sustainable client needs, rather than simply expanding around short-term hot topics.

In product planning, Zheng adopts a “core + satellite” approach. Allianz’s parent company, Allianz Investment, focuses on active management, so active strategy products form the core of Allianz Fund’s lineup. In the future, Allianz will also develop different styles within the core product line. In fixed income, they plan to launch products with varying risk-return profiles and gradually expand into pure fixed income strategies.

For satellite products, Allianz draws on and localizes the quantitative models and tools from its shareholder Allianz Investment, deploying some multi-factor index-enhanced quantitative products focused on specific industries and themes.

From this perspective, Allianz’s emphasis on being a “solution provider” is not just a marketing slogan but a comprehensive philosophy embedded in product design, research framework, and client service. Quantity is not the goal; clarity of positioning, stable capacity, and alignment with client risk-return preferences are key.

Four Major Future Trends in the Asset Management Industry

Looking ahead, Zheng believes the development of the asset management industry depends on the evolution of capital markets. Today, there are two significant changes in the role of capital markets: one, replacing real estate as a key area for residents’ wealth preservation and appreciation; two, serving the real economy and national strategies, while also reflecting and sharing the achievements of economic development. These changes make capital market development a national strategic goal, promoting a healthy, positive cycle, with improving quality of underlying assets.

Regarding future industry changes, Zheng sees several key aspects:

First, high-quality development of the asset management industry will become more ingrained. In 2019, Zheng mentioned performance benchmarks and excess returns, but few paid attention then. Today, everyone discusses high-quality development, long-term assessment, and objective performance evaluation, indicating a maturing market. Disorderly and short-term behaviors and ideas will gradually be phased out.

Second, competition will intensify and polarize. On one end are low-cost, highly homogeneous passive or tool-based products, including various index, thematic, and sector ETFs, with management scales becoming more concentrated, leading to a stronger “Matthew effect” and winner-takes-all dynamics. The competition will increasingly focus on marketing capabilities and resources.

On the other end are boutique active management firms, as the difficulty of generating alpha rises. Those capable of delivering excess returns can charge higher management or performance fees. As markets mature and become more efficient, generating alpha will become more challenging, requiring firms to establish their own moats and demonstrate sustainable alpha-generating ability.

Third, under high-quality development, market participants will become more professional and institutionalized. In terms of professionalism, the previous extensive development model will be replaced by deeper specialization in business models, product design, research frameworks, and operational details. Allianz’s risk models, whether in active or quantitative management, across equities, multi-asset, or fixed income, will be more widely adopted.

Institutionally, as market scale and maturity increase, individual investors will find it harder to consistently earn alpha. Although many tools are available for retail investors, few have dynamic asset allocation capabilities. Ultimately, many individual investors will find that outsourcing fund allocation to professional wealth management or asset management firms is more effective.

Finally, the capital market will become more internationalized. With further opening of the service and financial sectors, and the deepening of RMB internationalization, RMB assets will become a significant independent asset class in global markets, comparable to USD and EUR assets. As capital markets open up, the industry will see more international capital and institutions participating.

High-quality development is a crucial step for the capital market to align with international standards. Internationalization will bring more advanced investment concepts, innovative products, and strategies. Additionally, not only investment but also sales models, service quality, and standards will improve, supported by high-caliber talent.