In the world of index funds, particularly those tied to equity markets where the liquidity of constituent stocks might be limited, finding the optimal scale of operations can present a significant challengeThis is especially true for offering broader access while still prioritizing the interests of shareholdersFund managers often find themselves walking a fine line, balancing the need for growth with their fiduciary duties to investorsThe investment landscape is volatile and ever-changing, and as such, strategies for growth can sometimes yield mixed resultsUltimately, performance metrics determine success, and fund managers reap the rewards—or face scrutiny—based on their ability to generate returns for shareholders.

Recently, the Huatai-PB Fund encountered this very dilemma with its flagship product, the Huatai-PB SSE Dividend ETF (510880.OF). Announcing its 2021 dividends highlighted significant dissatisfaction among investors

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On January 12, 2022, the ETF declared that for every 10 fund shares held, the dividend would amount to only 0.86 yuan, marking the lowest payout in five yearsCompounding these concerns was a net asset value growth rate that fell short of expectations, leading many investors to voice criticisms regarding the management’s pursuit of scale over shareholder value.

The Huatai-PB SSE Dividend ETF, established in November 2006, was the company’s third fund and its first ETFBy the end of 2021, the fund had amassed 61.73 billion shares with a net asset value of 17.774 billion yuan, positioning it as the second-largest equity-oriented fund under Huatai-PBThe astounding growth in share volume— an increase of 28.37 billion shares throughout the year—was primarily fueled by an influx of capital in 2021, where net asset growth skyrocketed by 86.45 billion yuan, or an impressive 94.70% increase.

One of the key driving forces behind this growth was the shift in market liquidity brought about by regulatory changes in asset management

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The entire public fund sector benefitted during this period, with the total value of public funds in China jumping from 20.06 trillion yuan at the beginning of 2021 to 24.59 trillion yuan by year-end—a staggering 22.58% increaseWithin equity funds, which include both stock and mixed funds, there was a notable 24.68% increase in assets.

Among equity funds, those linked to the three major dividend indices, namely the CSI Dividend Index, SSE Dividend Index, and Shenzhen Dividend Index, experienced notably rapid growth as wellIn early 2021, the collective share count for these funds was 7.729 billion, but by the end of the year, that number ballooned to 11.370 billion, reflecting a 47.11% increase; similarly, their net asset value rose from 17.409 billion yuan to 24.254 billion yuan, a 39.32% hike.

The impressive expansion of the Huatai-PB SSE Dividend ETF positioned it as one of the fastest-growing funds in this category, surpassing the growth rate of other non-monetary public funds under Huatai-PB

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In the first half of 2021, the management fees for the Huatai-PB SSE Dividend ETF amounted to 34.63 million yuan, up from 9.94 million in the previous year—effectively a 2.48-fold increaseHowever, this rapid scale growth raised questions about whether it indeed benefited shareholders.

Performance issues compounded the scrutiny directed towards this particular ETFA concerned investor highlighted that while the fund’s scale approached doubling, its annualized net asset value growth rate was merely 10.94%, trailing behind the SSE Dividend Total Return Index by 2.31 percentage pointsIn contrast, 2019—a comparatively stable year in terms of fund growth—saw the ETF performing better than the benchmark, with a 16.51% growth rate against the Index’s 16.27%.

It's important to note, however, that documentations and figures may present statistical inconsistencies

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For instance, in 2020, the fund’s share volume saw a staggering 215% increase, and its net asset value outperformed the SSE Dividend Index during that period.

With the Huatai-PB SSE Dividend ETF employing a full replication investment strategy, its operations are closely tied to the SSE Dividend Index (000015.CSI), which is a well-established stock index comprising 50 components selected from the SSE 180 Index sample poolAdjustments to this sample occur annually, with criteria focusing on stocks that demonstrate consistent dividend yields above certain thresholds.

The adjustments can shift market dynamics significantly, as evidenced by the latest sample revision at the end of 2021, which included removals like SAIC Motor Corporation and additions such as Chongqing Department Store

Just a day following the revision, the index’s circulating market value decreased by 10.43%. For index funds employing a full replication strategy, such changes can introduce additional trading costs and lost opportunities linked to timely transactions.

Notably, discrepancies in stock weightings can also arise due to challenges in maintaining an appropriate scale that aligns with the available market liquidity for component stocksFor example, if Huatai-PB’s fund assets were to remain disproportionate relative to a component stock's market cap, investing a significant amount can risk price fluctuations that may be perceived similarly to market manipulation.

The deviation of stock weightings from the index has been a primary factor in the fund's performance lagAccording to the fund’s prospectus, a situation where the annual tracking error exceeds 2% under normal market conditions is not ideal

Yet, over 2021, this tracking deviation reached an average of 3.32%, with performance falling short of the SSE Dividend Total Return Index by a comparable margin.

When examining comparative performances among peers tracking similar dividend indices, noteworthy distinctions emergeThree primary indices exist that emphasize high cash dividend yields and stable payouts: the CSI Dividend Index, SSE Dividend Index, and Shenzhen Dividend Index, with the former two produced by CSI Index Company and the latter by the Shenzhen Stock ExchangeWhile maintaining high standards for earnings, the major differences among them include their pool of constituent stocks, with the CSI offering 100, SSE comprising 50, and Shenzhen displaying 40 stocks.

As of January 18, the comparison of assets under management reveals Huatai-PB SSE Dividend ETF taking the lead with approximately 17.903 billion yuan in assets followed by alternatives like E Fund and ICBC Credit Suisse Dividend ETFs