Looking at the latest data from the third-quarter reports of public mutual funds, there has been an unexpected change. Among equity-oriented public mutual funds, the market value of A-shares held by passive index funds has reached 51.11%, marking the first time in history that it has surpassed that of active equity funds.

Additionally, a significant amount of capital is now targeting broad-based index ETFs such as the CSI 300 and ChiNext 50, which has contributed noticeably to the excess returns of market leaders.

It should be said that the market value of passive index funds surpassing that of active equity funds is a change that has never occurred in the past, and it has been particularly evident in this year's market. Moreover, the market value of A-shares held by active equity funds has also dropped to a new low since the second quarter of 2020.

Let's discuss why such a historic change has occurred.

I have summarized the reasons, and there are mainly three:

Firstly, the core reason for the market value of active equity funds being surpassed by passive equity funds is the trust crisis that investors have with fund managers. In past bull markets, the various unsavory insider stories of public active equity funds, especially the phenomenon of buying at high levels, have been very repulsive to investors. Some investors even feel that it's better to invest in stocks themselves rather than let fund managers buy at high levels with their money. At least, investing in passive index funds is somewhat transparent. It is precisely against the backdrop of past fund chaos that investors' investment behavior has undergone a significant change, shifting from active equity funds to passive index funds.

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Secondly, over the past three years, some active equity funds have seen a much greater decline than the CSI 300 index, which is unacceptable to investors. Gradually, people have realized that although investing in index ETFs may not yield as much as individual stocks, at least it won't result in excessive losses. It cannot be denied that during previous market downturns, a considerable number of active equity funds have controlled drawdowns very well, providing a very poor investment experience for investors. This is why investors are turning to index investments. In fact, their mindset has changed; they no longer pursue excess returns but only hope to achieve average market returns, which is a manifestation of a mature investor mentality.

Thirdly, the A-share market is gradually aligning with international standards and adopting more of an overseas investment style. Observing the investment style of U.S. stock market investors, a large number of ordinary investors rarely participate in stocks directly and instead invest through ETFs, which has become a very popular international investment model. The fact that A-share passive index funds hold more shares than active funds can illustrate this point.

So, does this indicate that active equity funds are no longer popular in the market?

I believe not necessarily. For active equity funds, the test still lies in the personal investment charm of the fund managers. If, during a primary uptrend, the investment returns of passive index funds are more apparent, this is a hard-to-hide fact. However, from past experiences, when the market is volatile, especially during a slow upward process of advancing two steps and retreating one, active equity funds often achieve greater returns than passive index equity funds. If active equity funds manage their positions reasonably well, they can still bring excess returns to investors.However, there is one thing everyone must remember: the A-share market is primarily driven by policy, rather than fully reflecting the fundamentals. Under such circumstances, whether it is index-based investment methods or active equity investment, it is essential to fully control the market's cycles of ups and downs in order to maximize returns. It is not the case that index-based investment can change the aspect of not losing money during market downturns; there must be a clear understanding of this.

Disclaimer: The content in this article is for reference only and does not constitute any investment advice or suggestions. The stock market is risky; please invest cautiously!