59 Deeply Fallen Funds Rebound Over 30%, Small-Cap Stocks Regain Investor Favor

As the A-share market emerged from volatile recovery, tech sectors such as telecommunications and electronics led the rebound. According to Wind data, as of September 18, multiple funds that had previously drawn down by more than 40% subsequently rebounded by over 44%, while the number of year-to-date doubling funds rose back to 13.

Meanwhile, small- and micro-cap stocks returned to the spotlight with an index gain of 22.57%, and their share of trading volume increased. In a market where new leading themes have yet to be established, capital is flowing into “small ponds,” but consensus is accompanied by divergence, with some investors choosing to “take profits.”

Wang Ying, fund manager at CITIC-Prudential Multi-Strategy Fund, told Yicai Global that the underlying logic of the micro-cap strategy remains contrarian investing based on liquidity. Without new market-leading themes, the micro-cap sector may still possess the foundation for fluctuating upward trends.

Two-Thirds of Products “Recover”

Since the Shanghai Composite Index fell to its year-to-date low of 3,741.11 points on July 20, the A-share market has gradually risen amid volatility, with certain industries leading the “recovery.” Wind data shows that as of September 18, the Shanghai Composite Index gained 2.08%, while the Shenwan telecommunications and electronics sectors rose 17.15% and 12.1% respectively since August.

Benefiting from this trend, many actively managed equity funds staged a rebound. Tongyuan data indicates that among 4,901 actively managed equity funds with comparable data (including ordinary equity funds, flexible allocation funds, equity-biased hybrid funds, and balanced hybrid funds; only initial funds are counted), two-thirds posted positive cumulative returns since August.

Among the “recovered” list, the most prominent group consists of products that suffered severe setbacks in July. According to Yicai statistics, within the aforementioned scope:

• 62 actively managed equity funds recorded cumulative gains exceeding 30% between August 1 and September 18
• Of these, 59 had declined by more than 30% in July alone

“Technology”-oriented products demonstrated the sharpest rebounds. For instance:

• HSBC Jintrust Technology Pioneer fell more than 40% in July but achieved a period return of 49.22% since August, maintaining a year-to-date cumulative return above 70%
• Products such as Penghua Innovation Driven, Xinao Performance Driven A, and Caitong Technology Innovation A, which experienced drawdowns exceeding 40%, saw net asset value (NAV) rebounds surpassing 44%

Although some products did not suffer severe drawdowns in July, they quietly hit new NAV highs this month. For example, on September 18, 45 actively managed equity funds set new all-time high adjusted NAVs since inception. One case is CMF Quality Growth A, which rose 4.17% in July and further gained 31.88% since August, reaching a latest adjusted NAV of 1.0834 yuan.

After this round of rebound, many actively managed equity products have “recaptured lost ground.” Wind data shows that as of September 18:

• 2,888 funds posted positive year-to-date cumulative returns, compared to 2,528 at the end of July
• The number of year-to-date “doubling funds” increased again to double digits, reaching 13

Currently, E Fund Supply Reform leads year-to-date performance with returns exceeding 120%, followed closely by:

• E Fund Industrial Opportunity A
• Orient Artificial Intelligence Theme A
• Huian Trend Power A
• Caitong Multi-Strategy Fuxin

All of the above have year-to-date returns above 110%. Qianhai Kaiyuan HK-Shenzhen-London Enjoy Life saw its year-to-date return surge rapidly from 43.83% in the first seven months to 104.6%, successfully joining the ranks of doubling funds.

Why Is Capital Flowing into “Small Ponds”?

During this rally, micro-cap strategy products regained market attention, outperforming mainstream tech sectors. Wind data shows that as of September 18:

• The Wind Micro-Cap Stock Index accumulated a gain of 22.57% since August, temporarily outpacing the popular telecommunications and electronics sectors

From a product perspective:

• The median return of 87 small-cap funds with available data reached 9.98% during the same period
• Index-based small- and micro-cap tools led overall performance, with the largest period gain belonging to the ChinaAMC CSI 2000 Enhanced Strategy ETF, which rose 19.85%

Actively managed small-cap equity funds also performed impressively:

• CITIC-Prudential Multi-Strategy A and Nuoan Multi-Strategy A posted period returns exceeding 11%
• Veteran “showcase fund” Jinyuan Shun'an Yuanqi refreshed its historical NAV high this month

Amid rising NAVs, some products began proactively “restricting inflows.” Yicai noted that:

• Nuoan Multi-Strategy Hybrid, which had previously opened large subscriptions, implemented purchase limits for institutional investors starting in August, capping daily subscriptions at no more than 1 million yuan
• Hongde Hongye adjusted its large subscription limit to 1 million yuan this month

What Forces Support This Micro-Cap Rebound?

Tang Minwei, fund manager at CEIBS Fund’s Quantitative Investment Department, told Yicai that small- and micro-cap stocks, characterized by smaller market caps and concentrated float, can be viewed as A-shares’ “liquidity sensors,” as slight changes in capital liquidity trigger stock price fluctuations.

He further analyzed that since late July:

• The previously extremely concentrated tech theme began cooling down
• Trading crowding decreased
• Capital started dispersing

Having undergone deep adjustments with relatively clean chip structures, small- and micro-caps became a direction with lower resistance for positioning. “When public funds shift from extreme large-cap styles back to balance, they bring considerable incremental allocation capital to small- and micro-caps.”

Notably, as sector momentum heats up, market divergence gradually emerges, with some capital choosing to take profits at high levels. Taking CSI 2000 ETFs as an example:

| Period | Net Inflows | |--------|-------------| | July | 4.607 billion yuan | | August | 781 million yuan (slowed significantly) | | September (as of Sept 18) | Cumulative net outflows of 1.778 billion yuan |

Rebalancing Continues to Unfold

“The current market trading structure still favors micro-caps, presenting an overall state where dispersion outweighs concentration.” Tang Minwei believes that declining head concentration means capital is no longer overly focused on a few hot leaders but is more willing to seek opportunities across broader market cap and industry segments.

“In this microstructure, small- and micro-caps, having been deeply squeezed earlier, often serve as directions with greater elasticity to absorb rebalancing flows.” In his view, the core characteristic of the current market is the temporary cooling of the tech theme while new leading themes remain unestablished. Under a zero-sum game environment, hotspots tend to disperse, and rotation accelerates markedly. Small- and micro-caps offer precisely a differentiated exposure that “does not require predicting the next leading theme.”

Subtle shifts in capital flow are traceable in data. Regarding head concentration, Wind data shows that the proportion of total A-share trading volume accounted for by the top 50 stocks is declining:

| Period | Proportion | |--------|------------| | July | 23.11% | | August | 20.69% | | September (as of Sept 18) | 18.06% |

Simultaneously, against the backdrop of slightly reduced overall market turnover, activity in small-cap stocks clearly increased. For instance, on September 18, stocks with market caps below 5 billion yuan saw their share of total A-market trading volume rise from 6.85% in July to 10.07% in September.

Wang Ying believes that the primary source of returns mined by micro-cap strategies lies in stock price fluctuations of small-cap companies under liquidity shocks: positioning when market attention is low and trading is relatively quiet, then attempting to realize gains through trading once new capital flows in and trading activity increases.

Caution Advised

However, interviewees also cautioned that while the phased recovery of small- and micro-cap markets is attractive, investing in them does not mean indiscriminately buying all micro-cap stocks. Small- and micro-caps inherently exhibit high volatility and may experience significant drawdowns in extreme market conditions. Direct stock selection poses extremely high difficulty for ordinary investors, making participation via professional fund products a more prudent allocation approach.

“The quality of small-cap companies varies widely, necessitating rigorous fundamental screening to filter out firms with obvious risks such as high debt, persistent losses, insolvency, high-ratio pledges by major shareholders, abnormal audit opinions, or regulatory investigations,” said Tang Minwei. He added that disciplined quantitative trading combining technical indicators like market cap, trading volume, turnover rate, and price—not simple index replication—is essential. This mechanism makes research and investment coverage of small- and micro-caps extremely challenging for individual investors.