China's regulator moves to standardize mutual fund benchmarks

China's securities regulator is to implement new guidelines for strengthening the role of performance benchmarks in regulating mutual fund investments.

Widely used in overseas markets but less developed in China, performance benchmarks — typically stock or bond indexes — are the standards set by fund management companies to reflect a mutual fund's investment style, ensure that investment behavior aligns with the designated style, and evaluate fund performance.

The guideline, released by China Securities Regulatory Commission on Friday, has set out requirements for selecting and using performance benchmarks, placing primary responsibility on fund managers while clarifying the roles of custodians and distributors.

All these have formed a comprehensive oversight framework surrounding performance benchmarks and filled a long-standing regulatory gap, helping promote a more standardized fund industry development and improve investor returns from mutual fund investments.

The guideline, accompanied by an operational rulebook released by the Asset Management Association of China, requires performance benchmarks to reflect a fund's positioning and style, which should not be changed arbitrarily, including due to manager turnover, short-term market swings, or performance assessments and rankings.

Regulators will guide the industry through an about one-year transition period to ensure existing products adjust their benchmarks smoothly.

Informed sources told China Daily that fund managers are encouraged to adjust their benchmarks where needed rather than making large-scale portfolio shifts.

The guideline also calls on fund management companies to evaluate their teams based on investment returns. Managers of actively-managed, equity-focused funds whose long-term performance significantly lags behind their benchmarks will see a marked reduction in performance-based pay.

The move aims to strengthen the alignment of interests between fund managers and investors, with the Asset Management Association of China to soon refine its compensation assessment rules and spell out detailed requirements for the pay reform.