A Study On The Active Management Of Chinese Mutual Fund And Its Relation With Fund Performance

Chinese fund industry started in 1991, and after 20 years of fast development, according to Asset Management Association of China, at the end of 2015, there have been already 2722 Chinese mutual funds, and the total net asset has reached 8397.183 billion RMB. However, since 2001, when the first open-end mutual fund was launched, while the number of mutual funds has kept increasing, the total net asset has stopped growing for several years. Under this circumstance, the average size of mutual funds have kept decreasing and the competition among mutual fund managers has become unusually fierce. To make things worse, as index funds can provide investers market returns with only little management fees, now they have attracted more and more market attention. Compared with index funds, non-index funds can only attract investment by excess returns earned with active management.In this paper, I study the active management of Chinese mutual funds and its relation with fund performance. In my study, the active management includes both active stock-picking and active trading. First, to earn excess returns, mutual funds have to hold different stock portfolios other than the market portfolio. And the differences between the stock portfolio held by the mutual fund and the market portfolio can be a measure of the extent of stock-picking activity. Second, if a mutual fund manager chooses to apply market-timing strategy, he will have to trade constantly. So we can divide the value of stocks traded during a time by the total net asset of the fund to measure the extent of trading activity. No matter a fund manager does stock-picking, or trading, or both, he has only one purpose:to increase the fund performance. So in this paper, after studying the characteristics and the impact factors of active management, I focus on the relation between active management and mutual fund performance.In the theory analysis, I start from forming a theory frame with classic theories. All related theories can be divided into to groups according to their basic assumptions. The first group contains theories bassed on the efficient market assumption, and the second group contains theories bassed on the inefficient, or weak-efficient, or semi-efficient market assumptions. With different theories, relation between active management and fund performance are different. Moreover,I build a two period stochastic model to illustrate the relation between the extent of active management and the mutual fund performance. According to the model, the relation between active stock-picking and mutual fund performance is affected by risk preference of fund managers and market volatility, and the relation between active trading and the mutual fund performance negative.In the empirical analysis, I first estimate mutual fund performance. The curruent mufual fund performance measures can be divided into two groups. The first group contains returns-based approaches and the second group contains holdings-based approaches. In this study I take both approaches to measure mutual fund performance, and then apply bootstrap simulation for robustness analysis. I find that in China there is no mutual fund manager with investing skill. The returns of mutual funds are largerly earned by sharing the market risk. In the persistyency analysis, I find that the performance of Chinese mutual funds does not persist. I think there are three causes of the ineffeciency of Chinese mutual fund industry:first, Chinese stock market is inefficient; second, compared with the U.S. and the UK, Chinese fund industry is less developed; third, after the financial crsis, lots of experienced fund managers have left, while at the same time many new funds have emerged.After estimating mutual fund performance, I focus on the active management of Chiese mutual funds, and I first study the active stock-picking and then study the active trading. In the study on active stock-picking, I find that mutual funds with larger size and better former performance tend to be less active in stock-picking, and high market volatility will also decrease the extent of stock-picking activity. Moreover, the extent of active stock-picking is significantly negatively related to mutual fund performance, though with different fund style and different history period this relation tends to be different. In the study on active trading, the findings are as follows:first, the trading strategies applied by mutual fund managers are mainly short-term momentum strategies; second, Chiese mutual fund managers only have a little trading skill; third, high trading activity will lead to bad performance. In general, I find that the fund managers who are doing the stock-picking and trading actively are largely affected by market noises. As they tend to depent on the short-term momentum strategy, the mutual fund managed by them usually have bad performanceMy main contributions are as follows. First, I apply bootstrap approach in the study on Chinese mutual fund performance. Bootstrap approach was first introduced to fund performance analysis by Kosowski et al. (2006). With this approach luck can be divided from skill while abserving the real performance of mutual funds. Second, I divide active management into two parts:active stock-picking and active trading. The notion of active management was first mentioned by Cremers and Petajisto (2009), however, they only explained it as active stock-picking. However, except for stock-picking most mutual fund managers are also doing active trading, so active trading is also an important aspect of active management. Third, I use Turnover as the measure of active trading. Turnover was introduced by researchers as early as 2000, but it was only being used as a discription of mutual fund characteristics. In this paper, I use Turnover as a measure of active trading. A high Turnover means that the fund manager is trading actively, and vice versa.