The newly proposed guidelines on public fund performance benchmarks aim to fundamentally address long-standing issues of style drift in the industry. These comprehensive regulations establish internal control mechanisms for fund companies while standardizing third-party oversight. Additional supporting documents are expected to follow, accelerating the sector's shift from scale-driven growth to investor-return-focused high-quality development. From a sell-side research perspective, the rules may profoundly transform traditional brokerage revenue models and demand higher research capabilities.

▍Regulatory Update: On October 31, 2025, China's securities regulator and fund association jointly released draft guidelines and implementation rules for public fund performance benchmarks, currently open for public consultation. These complement the existing "Action Plan for Promoting High-Quality Development of Public Funds," with further supporting policies anticipated.

▍Key Provisions: 1. Benchmark Representation: Benchmarks must reflect core investment elements and styles specified in fund contracts, with changes strictly prohibited once set. 2. Enhanced Constraints: Fund managers must establish comprehensive internal controls to maintain investment style consistency. 3. Evaluation Function: Standardized requirements for benchmark usage in compensation assessment, fund sales, and performance evaluation. 4. Multi-layer Oversight: Strengthened disclosure requirements and custodian supervision alongside self-regulation.

▍Investor-Centric Principles: The draft guidelines emphasize four benchmark criteria: 1. Representativeness: Aligning with investment objectives and strategies 2. Objectivity: Quantifiable methodology with fair asset pricing 3. Binding Force: Managing deviations from benchmarks 4. Continuity: Prohibiting arbitrary changes to prevent style drift

▍Benchmark Classification System: The fund association will maintain two benchmark libraries: 1. Primary Library: Includes widely recognized market indices (e.g., CSI 300, CSI 500) 2. Secondary Library: Contains specialized industry/theme indices, requiring additional justification for use

▍Asset-Type Matching: Funds may select single or composite benchmarks matching their investable assets (equities, bonds, commodities, etc.), with precise alignment required between benchmarks and primary holdings.

▍Product-Specific Requirements: 1. Equity Funds: Broad-based indices for general strategies; specialized indices for sector/thematic funds 2. Bond Funds: Comprehensive indices for general portfolios; specialized indices for duration/credit-specific strategies 3. Index Funds: Must use their tracking index as benchmark

▍Enhanced Controls and Disclosure: Given that 27%-66% of funds underperformed benchmarks in recent years, the rules mandate: 1. Upgraded internal controls with independent monitoring units 2. Quantitative tracking metrics (information ratio, tracking error, etc.) 3. Detailed periodic disclosures comparing fund characteristics against benchmarks

▍Compensation Alignment: The guidelines reinforce linking manager compensation to benchmark-relative performance, with significant pay reductions for sustained underperformance.

▍Industry Impact: The rules are expected to: 1. Reduce fund turnover rates (currently averaging 388% for active equity funds) 2. Shift sell-side research demand from transaction-driven services to in-depth fundamental analysis 3. Reward research institutions demonstrating deep industry expertise and valuation capabilities

▍Transition Period: Existing funds have one year to adjust benchmarks, with custodian oversight commencing six months after implementation. Since the Action Plan's introduction, 57 funds have already initiated benchmark adjustments.

▍Risk Factors: Potential regulatory changes, intensified competition, economic slowdown, and market volatility.

▍Sector Transformation: By addressing style drift and strengthening accountability, the guidelines lay the foundation for floating-fee products and mark a decisive shift toward sustainable, investor-focused industry growth.