According to an analysis by Shenwan Hongyuan Securities, active equity mutual funds increased their allocations in Q4 2025 to technology manufacturing (communications/automobiles/machinery), cyclical sectors (non-ferrous metals/chemicals/building materials), service consumption, and non-bank financials; while reducing exposure to media, computers, defense, real estate, and pharmaceuticals.

Based on the PB-ROE framework and considering three dimensions—earnings expectations, valuation, and institutional positioning—sectors such as non-ferrous metals, basic chemicals, power equipment, along with thematic directions like AI applications and defense, demonstrate allocation appeal for 2026, supported by upward earnings revisions, reasonable valuations, and moderate crowding.

The main views of Shenwan Hongyuan are as follows: First, characteristics of active equity fund sector allocation: embracing AI and positioning for recovery. In Q4 2025, active equity mutual funds increased allocations to technology manufacturing (communications/automobiles/machinery), cyclical sectors (non-ferrous metals/chemicals/building materials), service consumption, and non-bank financials; while reducing exposure to media, computers, defense, real estate, and pharmaceuticals.

Funds are front-running recovery expectations for 2026 by increasing allocations to pro-cyclical sectors. A prominent feature of Q4 2025 was the significant increase in allocations to pro-cyclical industries. Globally priced non-ferrous metals saw their allocation share rise by 2.1 percentage points to 8.0%, hitting a record high, with a configuration coefficient reaching 1.7x, nearing its historical peak.

Simultaneously, industries at a fundamental trough with expectations of price increases or reduced internal competition, such as basic chemicals, automobiles, building materials, and steel, also saw increased holdings. Their allocation shares were 3.2%, 5.1%, 0.7%, and 0.4% respectively, with configuration coefficients of 0.79x, 1.24x, 0.91x, and 0.44x.

Furthermore, driven by expectations surrounding Hainan's customs closure and 2026 consumption policies, the social services sector saw a slight increase in allocation to 0.3%, with a configuration coefficient of 0.5x, still at a historically low level.

Additionally, non-bank financials, which have solid fundamentals but underperformed in 2025, also received increased allocations. Non-bank financials were added to amid their relative underperformance in 2025 despite stable fundamentals; their allocation share is 2.4%, at the 33rd historical percentile, with a configuration coefficient of 0.37x.

Using the CSI 300 as a benchmark, non-bank financials are the second most underweight sector after banks, underweight by 7.4 percentage points relative to the index.

The embrace of AI continues, with communications allocations hitting a record high. 1) The most notable feature of Q4 2025 mutual fund holdings remains the embrace of the AI theme. Although the electronics sector's allocation slightly decreased from 25.7% last quarter to 23.9%, it remains the highest among all sectors, with a configuration coefficient of 2x, at the 70th historical percentile.

The communications sector was even more prominent, with its allocation share increasing by 1.8 percentage points to 11.1%, a record high, and a configuration coefficient exceeding 3x, the highest among all sectors. At the individual stock level, Zhongji Innolight and Eoptolink replaced CATL and Tencent Holdings for the first time as the top two largest holdings by mutual funds.

2) The overall TMT allocation share was 38%, down 2 percentage points from the previous quarter but still higher than the peak during the 2015 internet rally and the 2022 new energy allocation peak. Allocations to media and computers were 1.3% and 1.6% respectively, at historical lows and continuing to be reduced.

Looking ahead to 2026, as the AI application trend deepens, related industry chains, especially the application segment, are expected to see renewed increases in allocation.

3) Historical review shows that after a single sector's allocation approaches or exceeds 20%, it often oscillates at high levels for 2-5 quarters and does not necessarily decline immediately. Allocation peaks often coincide with or slightly lead price peaks, while the sector's fundamental peak typically lags by 1-3 quarters.

In the short term, the embrace of AI is expected to continue in Q1, catalyzed by liquidity and industry events, while attention in the second half of 2026 should focus on movements by industrial capital.

Sectors facing减持 were concentrated in real estate, pharmaceuticals/consumption, defense/new energy, and some segments within TMT. Real estate allocations declined further, with allocation share and configuration coefficient at 0.3% and 0.24x respectively, both at historical lows.

Within consumption, beauty & personal care, agriculture, forestry, animal husbandry & fishery, home appliances, and textiles & apparel primarily saw reductions. Their allocation shares were 0.1%, 1.0%, 2.6%, and 0.2% respectively; except for home appliances with a coefficient of 1.35x, all others were below 1x, indicating underweight positions relative to the market standard.

Furthermore, pharmaceuticals continued to see reductions amid a fundamental bottoming process. The current allocation by active equity funds is 8.2%, a historical low, with a configuration coefficient of 1.41x. Excluding pharmaceutical theme funds, the allocation is merely 3.7% with a coefficient of 0.64x, almost a historical low.

In the defense sector, aside from aerospace equipment, all other sub-sectors saw reductions. The overall sector allocation decreased by 0.3 percentage points in Q4 2025 to 2.7%, with a configuration coefficient of 0.91x, below the market allocation.

Additionally, wind power and batteries within the power equipment sector also faced reductions. The sector's overall allocation is 11.5%, with a configuration coefficient of 1.57x.

Second, net asset value performance of active equity funds: Net redemption pressure eased, and the wealth effect gradually warmed. Looking ahead to the 2026 market, mutual funds are expected to enter a positive feedback cycle.

In Q4 2025, the overall positions of ordinary stock funds, partial equity hybrid funds, and flexible allocation funds decreased by 1.2, 1.4, and 1.4 percentage points to 88.3%, 86.7%, and 76.3% respectively, remaining at relatively high levels.

Driven by the technology theme in 2025, the wealth effect of active equity funds expanded, with significant recovery in outperformance. For the full year 2025, the median net asset value increase for active equity mutual funds was 25.8%, weaker than the ChiNext and STAR 50 indices, roughly equivalent to the CSI 500 and NZ 2000, but stronger than the CSI 1000, CSI 300, and Shanghai Composite Index.

Since Q3 2024, the tech rally has persisted for over a year, with the median active fund rising over 50%, but the duration and magnitude have not yet reached historical highs.

From a behavioral finance perspective, investors tend to redeem products that have recovered to near their cost basis. In Q4 2025, active equity funds experienced redemptions of 132 billion units, with net redemptions of 72.7 billion units for the quarter, indicating some easing of net redemption pressure compared to Q3.

Third, passive mutual funds: ETF scale and market value holdings both hit new highs. ETF scale continued to rise in 2025. In Q4 2025, the total scale of equity ETFs approached 3.8 trillion yuan, with ETF holdings accounting for 3.9% of market value, both setting new records and marking the fifth consecutive quarter exceeding the market value share held by active equity mutual funds.

Equity ETFs saw net inflows overall in Q4 2025, but have experienced net outflows of over 300 billion yuan since January 2026. Among broad-based ETFs, the CSI A500 saw significant momentum in Q4 2025, while most broad-based indices have seen substantial net outflows since 2026.

For sector ETFs, brokers, pharmaceuticals, robotics, and non-ferrous metals ETFs saw significant increases in shares outstanding in Q4 2025; since 2026, software, media, power grid, satellite, non-ferrous metals, chemicals, and Hong Kong-listed tech ETFs have seen notable net inflows.

Fourth, fund manager views and multi-dimensional sector comparison based on the PB-ROE framework. Q4 2025 reports indicate fund managers are generally bullish on areas with clear industry trends, export potential, and policy support, such as computing power, semiconductors, non-ferrous metals, energy storage/lithium batteries, innovative drugs and medical devices, military trade and commercial aerospace, chemicals, and steel. These consensus views are already reflected in holdings.

Based on the PB-ROE framework, considering earnings expectations, valuation, and institutional positioning across three dimensions, sectors like non-ferrous metals, basic chemicals, power equipment, and themes like AI applications and defense possess allocation appeal for 2026, given upward earnings expectations, reasonable valuations, and moderate crowding.

Fifth, risk warnings: 1) Mutual funds represent only a portion of market capital and are not fully representative; 2) Fund quarterly report data has a time lag; 3) This analysis is based on the top ten holdings disclosed in fund quarterly reports and may contain errors compared to the full portfolio of fund holdings.