Eliza Wong
The Rise of China’s Smaller Fund Champions
China’s A-share market has established a firm ‘slow bull’ (慢牛) trend over the past year, generating successive structural market opportunities that have rotated through robotics, new consumption, innovative pharmaceuticals, and AI computing power sectors. Against this backdrop, China’s public fund industry has surpassed 35 trillion yuan in assets under management, with ETFs and technology-themed funds serving as key growth drivers. While large firms like E Fund Management (易方达基金), China Asset Management (华夏基金), and Huatai-PineBridge Fund Management (华泰柏瑞基金) continue to dominate through comprehensive product offerings and ETF tools, a new cohort of smaller, agile fund companies is demonstrating that strategic focus and specialized expertise can deliver superior returns.
Structural Markets Create Opportunities
The current market environment, often referred to as the ‘924行情’ (September 24th market trend), has consistently favored thematic and sector-specific investments rather than broad market moves. This structural characteristic has created ideal conditions for fund managers with deep sector expertise and concentrated portfolios to outperform their more diversified counterparts.
Small But Beautiful Fund Companies Defy Expectations
According to Wind data, as of the end of Q2 2025, 19 public fund companies (excluding securities asset management licensed public funds) managed between 20-50 billion yuan in assets. Remarkably, as of September 16th, 15 out of 14 companies in this size range (data includes recent entrants) achieved positive average returns across all products over the past year. Leading this outperformance, Red Soil Innovation Fund (红土创新基金) delivered an impressive 115% average return across all active equity products, ranking first among all public fund companies and demonstrating significant alpha generation during the market uptrend.
The Performance Leadership Table
Recent data reveals extraordinary performance from several smaller fund companies:
– DeBond Xinxing Value (德邦鑫星价值): 275.52% one-year return, ranking first industry-wide
– China Europe Digital Economy (中欧数据经济): Over 200% one-year return
– China Aviation Opportunity Navigation (中航机遇领航): Over 200% one-year return
– Yongwin Advanced Manufacturing Smart Selection (永赢先进制造智选): Over 200% one-year return
– Red Soil Innovation Emerging Industries (红土创新新兴产业): 182% one-year return, ranking 1st among 2,303 peers
The Red Soil Innovation Success Story
Red Soil Innovation Fund represents a compelling case study in how smaller fund companies can leverage unique advantages to achieve outstanding results. As China’s first venture capital-backed public fund company with shareholder Shenzhen Capital Group (深创投), the firm has overcome traditional channel disadvantages through strategic positioning and resource utilization.
Strategic Advantages of VC Background
Unlike fund companies with banking or securities backgrounds, Red Soil Innovation has leveraged its parent company’s extensive network and expertise. Shenzhen Capital Group manages over 510 billion yuan in various assets, has directly invested in 1,700 companies, and maintains leading positions in information technology, equipment manufacturing, new materials and new energy, and health industries. This extensive investment network provides Red Soil Innovation with unparalleled insights into emerging sectors and growth companies.
The ‘Industry-Research-Investment Integration’ Platform
Red Soil Innovation has developed what it calls an ‘产研投一体化’ platform (industry-research-investment integration platform), positioning itself as the secondary market investment arm within Shenzhen Capital Group’s full life-cycle fund matrix. This approach differs significantly from conventional public fund research systems by focusing on growing with the capital markets, growing with excellent enterprises, and growing with investors.
Investment Philosophy and Execution
The remarkable performance of these small but beautiful fund companies stems from disciplined investment approaches rather than speculative strategies. Red Soil Innovation emphasizes its commitment to ‘受人之托、忠人之事’ (entrusted with people’s money, loyal to people’s affairs) responsibility investment philosophy, focusing on long-term returns rather than short-term profit chasing or credit quality reduction for scale expansion.
Research Depth Over Breadth
With an average of over 10 years of secondary market investment research experience, Red Soil Innovation’s team collaborates with Shenzhen Capital Group’s 200+ investment management professionals and leverages China’s first venture capital industry postdoctoral workstation. This deep expertise enables identification of long-term growth sectors and innovative companies across different industry development cycles.
Three-Dimensional Collaborative Platform
The company has built a three-dimensional collaborative platform combining industry insight, research empowerment, and investment decision-making. This approach helps capture policy directions and industrial chain transformations, identify alpha sources, and uncover structural opportunities in prosperous sectors, ultimately delivering full-cycle investment services from market research to value realization.
Challenges Facing Smaller Fund Companies
Despite recent outperformance, smaller public fund companies face significant structural challenges and the reality of being ‘small boats easily squeezed’ in competitive waters. Industry concentration and Matthew effects are pronounced, with smaller players at a disadvantage in capital, brand, channels, product innovation (ETFs, public REITs, personal pension exclusive products), and customer accumulation.
Distribution and Scale Disadvantages
Smaller fund companies typically have weaker bargaining power regarding product placement, display resources on bank, securities, and internet distribution platforms, and institutional large allocations. Their limited market competition position also means smaller investment research teams and coverage compared to mid-sized and larger peers, creating challenges in cultivating and retaining core research and investment talent.
Performance Sustainability Concerns
These limitations can affect product long-term performance sustainability and stability. During sustained market downturns, smaller public fund companies often face greater challenges due to limited product layouts and relatively weaker risk resistance capabilities. However, the China Securities Regulatory Commission’s (中国证监会) public fund high-quality development action plan provides institutional opportunities by correcting industry incentive orientations and creating a system environment where ‘performance and professionalism prevail’.
The Path Forward for Smaller Fund Companies
For smaller fund companies, performance breakthrough has become the best development path. Current data demonstrates that these firms have indeed proven their investment research capabilities through product performance. Beyond short-term results, many have maintained strong longer-term track records, with DeBond Xinxing Value ranking first in its category for both one-year and two-year performance and third for three-year performance.
Governance and Stability Factors
Strong shareholder support and stable senior management teams are crucial for fund company performance stability. Some smaller fund companies have experienced frequent equity changes and executive iterations, creating governance challenges. The successful transformation of New China Fund (新华基金) exemplifies how positive changes can drive performance improvement. Since Q4 2024, the company completed equity changes, capital increases, and leadership succession, with Beijing SASAC injecting capital and new leadership from shareholders establishing investment+management support structures.
Strategic Positioning for Future Competition
Smaller fund companies that quickly clarify development positioning, complete investment research and product matrix upgrades, and achieve interest alignment with investors will most likely break through in the next round of industry competition. The current performance leaders are demonstrating that focused strategies and specialized expertise can overcome scale disadvantages in today’s market environment.
Implications for Investors and the Industry
The emergence of these small but beautiful fund companies represents a significant development in China’s asset management landscape. For investors, it demonstrates that smaller, focused managers can deliver exceptional returns, particularly in structural market environments that reward specialized knowledge and concentrated positions.
Diversification Beyond Large Fund Houses
Sophisticated investors should consider allocating to top-performing smaller fund companies as part of a diversified investment approach. While large fund houses offer stability and comprehensive product ranges, smaller firms often provide greater flexibility, faster decision-making, and deeper sector expertise in their focus areas.
Industry Evolution and Specialization
The success of these smaller players suggests China’s fund industry may be evolving toward greater specialization, with firms developing distinctive competencies rather than attempting to compete across all product categories. This trend aligns with global patterns where boutique asset managers often outperform larger competitors in specific strategies or sectors.
Looking Ahead: Sustainability and Growth
The critical question for these outperforming smaller fund companies is whether they can sustain their success as they grow. History suggests that maintaining exceptional returns becomes increasingly challenging as assets under management increase, potentially diluting the focused strategies that drove initial outperformance.
Balancing Growth and Performance
Red Soil Innovation and other leading smaller firms are already addressing this challenge by re-examining company development strategies. In response to the latest fee reform requirements, they are planning short, medium, and long-term business development while balancing short-term operational pressures with long-term development goals through supporting management mechanisms.
Enhancing Investor Experience
These companies are also improving assessment and evaluation systems, increasing focus on product performance and investor experience, enhancing professional capabilities and investor services, and improving investor satisfaction at institutional and product performance levels. This focus on investor outcomes rather than simply gathering assets suggests a mature approach to sustainable growth.
Final Analysis: The New Fund Landscape
The remarkable performance of China’s smaller fund companies during the current structural market represents more than a temporary anomaly. It demonstrates how focused investment approaches, specialized expertise, and agile decision-making can overcome scale disadvantages in appropriate market conditions. For investors, this development offers valuable opportunities beyond the traditional large fund houses, while for the industry, it suggests increasing diversification and specialization.
As China’s capital markets continue evolving and structural opportunities persist, these small but beautiful fund companies appear well-positioned to continue delivering exceptional returns. However, their long-term success will depend on maintaining investment discipline, managing growth carefully, and continuing to prioritize investor outcomes over asset gathering. For sophisticated investors seeking exposure to China’s dynamic equity markets, these smaller firms deserve serious consideration as part of a diversified investment approach.
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