The year 2025 is shaping up to be quite challenging for fund investmentsAs we find ourselves amidst polarized opinions, it seems crucial to analyze the landscape and strategize effectively for the upcoming year

On one side, some believe in an aggressive approachThey predict that with Chinese policies rolling out, the economy is likely to stabilize and reboundAfter recent interest rate cuts, market liquidity is expected to improve, suggesting this is the time to pursue lucrative opportunities

Conversely, another faction argues for a defensive posture

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They contend that with political changes across the strait, global dynamics could grow increasingly turbulent, which may disrupt markets in ways we cannot overlookThe recovery in fundamental economic indicators presents its own share of uncertainties, prompting a focus on high-probability strategies this year

Both camps might be engaging in extreme views; a middle-ground approach could be more prudentPersonally, I share an optimistic outlook on the cash markets, hoping for a significant rally driven by policy supportHowever, recent years have taught us hard lessons; even in our most bullish forecasts, it is wise not to go all-in on aggressive positionsA balanced mix reflecting defensive holdings is essential, as unexpected events are always possible in the market

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So how should one implement defensive strategies? The prevailing practices revolve around two primary approaches: bonds and dividend stocksLet’s break down the current scenarios related to these two investment avenues

With bond yields currently sitting at remarkably low levels, many investors might question the feasibility of a bull market in bonds.

Typically, investors focus primarily on government bonds, but it is important to remember that the bond market is multifaceted, comprising both government and corporate bonds

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Presently, both sectors show considerable opportunities

First, let’s discuss the area of government bondsFollowing a prolonged downward trend in yields, they have recently begun to exhibit volatilityThis shift stems primarily from market expectations regarding delayed interest rate cuts and ongoing regulatory measures from the central bank, such as halting purchases of government bonds

While these actions may suggest short-term bearish sentiment for the bond market, the long-term implications could promote a healthier and more sustainable bond market landscape

Some analysts believe the current performance of government bonds has largely priced in expectations for coming interest rate reductions

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Nevertheless, feedback from institutions reveals prevalent predictions that the yields on treasury bonds will continue to decline

Why is this the case? The answer is straightforward: there is an abundance of capital within institutions that currently has limited avenues to channelled

On one hand, changes made in November to address irregularities in non-bank institutions' interbank deposits resulted in substantial shifts in fund placement within institutional clients; on the other hand, following rate cuts, overall market liquidity is set to expand significantly, leaving institutions with even more capital to invest

In this scenario, government bonds present as an asset class with relatively high yield predictability and controlled risk, making them a preferred choice for institutions

Similarly, corporate bonds also present attractive opportunitiesHowever, they face a significant challenge with limited high-quality supply amidst the backdrop of a debt resolution push this yearThis 'asset scarcity' issue continues to loom over the credit market

Hence, for many institutions looking to allocate capital, medium to high-grade corporate bonds are proving to be highly attractive, especially following the bullish trend in government bonds, signaling an opportunity for corporate bonds to catch up in yieldInterestingly, compared to government bonds, corporate bonds’ potential for yield enhancement is significantly promising

From this standpoint, numerous fund managers are increasingly inclined to seek out fund options focused on corporate bonds, supplemented with government bonds, for long-term investmentsAmong these offerings are quality products like the Zhejiang Pure Bond C Fund (003157) that have gained attention

The fund’s name indicates its pure focus on bonds, with holdings solely comprising fixed-income assets like bonds and commercial paper, excluding equitiesIts performance track record has been quite impressive since inception in August 2016, consistently demonstrating stability and securing a high rating within its peer group, as evidenced by its five-star Morningstar rating

Specifically, the fund’s investment composition primarily tilts heavily towards corporate bonds with government bonds constituting around 20% of its portfolio, as per its latest quarterly report

As previously indicated, the influx of institutional capital continues to prioritize fixed income holdings, making it vital that products align with institutional preferencesNotably, as of mid-last year, nearly 51% of investments in the Zhejiang Pure Bond C Fund were from institutional stakeholdersThis speaks volumes about its appeal to institutional investors

Now, turning our attention to dividend assets, the rationale for considering these lies in the desire for diversified fund allocation, essentially seeking greater return efficiency

Putting all capital into bonds may confer stability, but it often yields limited returnsIn unique years like 2023, when extraordinary bond market performance led to considerable gains, such returns are decidedly rareHistorical performance indicates that conventional pure bond funds typically offer annual returns in the range of 4-6%.

For those seeking more than just basic returns, embracing a degree of risk — specifically by incorporating equity assets into their portfolio — becomes necessary

Dividend stocks, in this context, pose a lower risk compared to growth stocks; this stems from the fact that dividend-paying stocks provide a level of stability by offering regular dividends in addition to potential capital gains, thus establishing a “safety net” for investors

Moving forward, two primary dynamics could drive the upward trajectory of dividend stocks

The first is the continually rising dividend yieldsAs of January 15, 2024, according to data from the China Securities Index Company, the dividend yield for the CSI Dividend Index reached an impressive 6.22%. Such returns attract substantial capital from large institutional bodies like social security and insurance funds, which typically prioritize defensive allocationsMoreover, it’s reasonable to anticipate further increases in such yields given current supportive policies fostering dividend distributions

The second driver is the ongoing demand from institutions for defensive allocations amid uncertain economic landscapes

With a projected uptick in liquidity from interest rate cuts, the substantial volume of available capital means institutions will lean further toward defensive assetsConsidering the uncertainties surrounding global conditions and the recovering domestic economy, the focus on dividends will accentuate

Over the past 20 years, the average annualized return for the CSI Dividend Total Return Index, which incorporates dividend earnings, stood at a remarkable 13%.

To effectively harness dividend assets, investing in index funds represents a more advantageous strategyIndex funds are distinguished by transparent holdings, providing investors with a clear perspective

Additionally, they typically offer lower fees, making them a cost-effective choice

One prominent example of an index-linked fund that taps into the CSI Dividend Index is the Zhejiang CSI Dividend ETF Connect C (012644). Since its inception on February 23, 2022, it has reported cumulative returns of 10.85% as of January 15, 2025, diverging favorably from the slight decline of 0.14% in the CSI Dividend Index over the same period

This indicates that investing in an index fund like the Zhejiang CSI Dividend ETF Connect A can lead to long-term gains, allowing holders to benefit not only from the beta earnings of the CSI Dividend Index, but also from the alpha returns generated by asset managers, thereby maximizing yield potential amid a defensive framework