An Empirical Study Of Mutual Fund Performance And Its Impact

Since the first open-end mutual fund, Hua An Chuang Xin, established in September2001, the Chinese mutual fund industry have experienced rapid development. At present, Mutual funds have become one of the most important institutional investors in Chinese capital market. In this thesis, I firstly study the mutual fund performance and then investigate the impact of mutual fund performance on mutual funds from different angles.The thesis is divided into nine chapters.Chapter one is the introduction. In this chapter, I introduce the research background, importance, framework, question, research methods and the contributions of this thesis.Chapter two is literature review. I summarize five aspects of literature including mutual fund performance and persistence, mutual fund flow, fund manager turnover, investment style and risk-taking of fund managers.Chapter three shows the current situation of mutual fund industry. I firstly introduce the development stages of Chinese mutual fund industry, then summarize the number and size of mutual funds, the investment style of mutual funds, the market influence, market concentration,and lastly report the basic characteristics of open-end mutual fund investors.In Chapter four, I evaluate the performance of equity mutual funds from2005to2010. Three questions are analyzed in this part. Can mutual funds beat the market? Does mutual fund performance come from luck or skill? Is mutual fund performance persistent? I find that most mutual funds can beat their self-designed benchmarks in every year except2009. Both the equal-weighted mutual fund portfolio and value-weighted portfolio can get significantly positive risk-adjusted return. From the analysis of single mutual fund, I find that most mutual funds’ Fama-French three-factor Alpha are positive and about36%of mutual funds have significantly positive three factor Alpha in5%significance level. This means that mutual funds as a whole can beat the market. Then I use bootstap method to distinguish luck and skill, the result shows that the mutual fund performance is totally from skill, not from luck. The performance of mutual fund is persistent only in3-month short period, but does not last in one year period.Chapter five is empirical research on the relationship between mutual fund past performance and fund flow. I examine whether there is "redemption puzzle" in Chinese mutual fund industry, and whether the flow-performance relationship is linear or convex. I find that last year return, both the cardinal return and ordinal return, has positive effect on the net flow of mutual funds. This means that investors as a whole chase good performance, and the redemption puzzle doesn’t exist. The risk of mutual fund has no significant effect on mutual fund flow. Then I use piecewise regression and dummy variable regression to find that the flow-performance relationship is not linear, but convex. The past star funds can get excess inflows, but the dog funds’ flow is not sensitive to past performance. The robustness test supports the above conclusions.Chapter six examines the relationship between mutual fund performance and manager’s turnover. I find that the relative performance of mutual fund has negative effect on the probability of manager turnover. But the past absolute performance of mutual fund has no effect on the probability of magager turnover. The worse the relative performance of mutual fund, the larger the probability of manager’s turnover is. I then compare the change of mutual fund performance before and after magager turnover. For the underperformers, I document significant improvements in post-replacement performance relative to the past performance of the fund. On the other hand, the replacement of overperforming managers results in deterioration in post-replacement performance.In Chapter seven, investment style consistency and its relationship with mutual fund performance are studied. I use Fama-French three-factor model to identify mutual fund’s investment style and find that the investment style of mutual funds dominates in large and growth stocks. There is some consistency in size style, but little consistency in value style. Besides, I find no evidence that the fund portfolio is able to time size or value style. Moreover, past performance has no effect on the size style of mutual funds, but has some effect on the value style of mutual funds. Style shift affects the future performance of mutual funds. Chapter eight studies how annual performance ranking affects fund managers’ risk-taking behavior. Using a large sample of open-end mutual funds in China between2005and2010, I find that mid-year losers increase portfolio risk in the late year to a greater extent than mid-year winners. Moreover, I find that the future performance of mutual funds is not related to increase in portfolio risk. In particular, during bear markets, increasing portfolio risk can decrease future performance of mutual funds.Chapter nine is the conclusion of this thesis. It consists of the main findings of this thesis and the implication.This thesis contributes to the literature in following several aspects. Firstly, I evaluate the equity mutual fund performance in the period of2005-2010. And I use the bootstrap method to distinguish luck and skill. Secondly, I contribute the flow-performance literature. I overthrow the so called "redemption puzzle" and support the result of Xiao Jun and Shi Jing (2011) that mutual fund investors as a whole chase past relative performance. Besides, I document that the flow-performance relationship is convex, which are not found in Xiao Jun and Shi Jing (2011). The past overperformers can get excess net inflows. Thirdly, different from the previous literature which studies close-end fund manager turnover, this thesis explores open-end mutual fund manager turnover in detail. Fourthly, I use Fama-French three-factor model to identify mutual fund investment style and investigate the style consistency of mutual fund. Lastly, this thesis contributes to the literature in risk-taking behavior of fund managers. Using a large sample of open-end mutual funds in China between2005and2010, I study how annual performance ranking affects fund managers’risk-taking behavior, and the effect of risk-taking on future performance of mutual funds.