Study On The Performance Tunneling Behavior Of Mutual Fund Families Based On The Investor’s Performance Sensitivity

The proliferation and expansion of fund families are important features of mutual fund market in domestic and abroad.The generation of large-scale fund family can make the investment fund companies reduce operating costs through the sharing of information and R and D resources and bring about economies of scope.Sirri and Tufano(1998)recognized in the 1990s that the new organization of fund market,fund family can reduce investor’s search costs and provide investors with more additional services.Therefore,the fund families have won the favor of investor’s and get rapid development.But the fund family’s particular dual-agency structure adds a new problem into the agency conflicts between the fund investors and fund managers.The interest of fund family as a whole and those of the individual funds within the family are not consistent with each other,which resulting in internal tunneling behavior with the fund management companies in addition to moral hazard behavior of fund managers.Gaspar et al.(2006)pointed out that with the purpose of maximizing their own interests,the fund management companies will make internal tunneling between different funds affiliated with the companies.They will raise the performance of favored funds at the expense of other funds.This behavior violates the principles of fair transaction,leading to the presence of artificial performance differences among the funds inside fund family and undermines the interests of investors who have invested in the sacrificed funds.We have already pointed out that the conflicts of interests between the fund family as a whole and individual funds affiliated with the fund family which resulted from the particular dual-agency structure of fund family are the intrinsic motivation of internal tunneling inside the family.However,this behavior is also dependent on the subscription and redemption behavior of fund investors.Because of the fixed management fee ratio,the subscription and redemption behavior of fund investors have implicit incentive effect on fund managers.Only through the purchase and redemption of funds,the improvement of fund performance through internal tunneling behavior can ultimately attract capital inflows.Caffrey(2006),Gaspar et al.(2006)and Guedj and Papastaikoudi(2008)have found that:the tunneling behavior of fund families is dependant on the convex FPR and the spillover effect of star fund.It is in recognition of all the management behavior of fund managers are based on investor behavior,so we have studied the mechanism of internal tunneling behavior inside fund families from this perspective of fund investor’s behavior.Both the proliferation and expansion of fund families and the characteristics of fund investor’s behavior are affected by the fund market environment.For the purpose of studying the process and trends of mutual fund market development,revealing the backgrounds and motives of the behaviors of fund investors and fund families.We introduced the development history and current situation of fund market at home and abroad in Chapter III,summed up the characteristics of China’s fund market.We describe the composition of the fund investors and their behavior characteristic,the status of fund family development and the corporate governance issues of fund families.The retrospect of China’s mutual fund markets implies that fund market has experienced significance changes.The main manifestation of this change is a substantial increase in size of the market,an increasingly competitive market,the proliferation of fund family,and the perfection of market institutions.Since the fund investor behavior constitute two elements of this study,Chapters IV use the sample of open-end stock funds data from 2005 to 2012 in China’s fund markets,analyze in details the features of fund investor behavior in the sample period.Whether using a line chart grouping average method,or panel data regression approach,we have found that the sample period of open-ended equity funds flow-performance relationship(FPR)is positive and convexity.Fund FPR just describes the relationship between the ratio of net inflows and the fund’s historical performance,Chapter IV has quantitatively measured the characteristics of FPR by investor’s performance sensitivity.By estimating the regression coefficients of performance variables in the net inflows regression model,we measure the investor’s performance sensitivity.Positive investor’s performance sensitivity corresponds with positive FPR.By introducing the piecewise linear regression functions,we can use merit and performance level inferior level of fund performance regression coefficient estimates to measure the difference in the convexity fund FPR features.Positive and convex FPR indicates that China’s fund investors generally chase good performance and show positive feedback behavior,but due to the investor psychology,the market institution and the market operation efficiency reasons,the investors in domestics market have the same behavior characteristic like convex FPR.This study also found that in the sample period the behavioral characteristics of fund investors will varies with cross sections and periods.Terms of the changes from the period,the grouping average line chart analysis in fourth chapter showed that the,ratio of net capital inflows increases as the time changes,the volatility of the fund FPR curve getting smaller and the "redemption Anomaly" gradually disappeared,positive and convexity features of fund FPR are more and more significant,the results of the sub-sample regression results indicate that investor’s sensitivity decreases with the period,which means that a rational investor behavior are gradually increasing,but still has the characteristics of bounded rationality.From the perspective of changing behavior of investors,we are able to explain the Contradictory findings concerning"Redemption Anomaly".In the early studies of China’s fund FPR,the sample period is covered the period when there are more irrational factors in fund investor’s behavior and the "redemption Anomaly" is more significant.So Lu et al(2007)has confirmed this phenomenon.However,with the changes in the market environment,investor behavior also changed,and therefore more and more investors are rational,"Redemption Anomaly" is gradually disappearing.Therefore,Xiao and Shi(2011)did not find this phenomenon.Our empirical study found that the fund investor behavior characteristics vary with the period,our further analysis led to this behavior change factor.We use GDP growth rate as proxy indicators of economic environment,confirming the economic environment on investor psychology,and thus the Fund FPR convexity.In addition,the degree of market competition lead to reduction in information cost,as well as the fund investors improved ability to access to information,which will both lead to a rational investor behavior.To analyze from the perspective of changing fund features,total sample is divided into different sub-samples according to the fund characteristics.The average packet line graphs show that the older and the larger the fund,the higher the net inflow ratio of fund.The younger and the smaller the fund,the more volatility of FPR and the more significant "Disposition Effect" or "Star Effect",and the more convex of FPR.We make further study by using interactive terms regression methods and find that fund size generated a negative impact on the ratio of net capital inflows to the Fund and fund age,fund risk,fund family size has a positive impact.Fund Age positively influence the results consistent with Chapter IV,indicating that the old fund of fund investors and large-scale fund managers have the ability and experience in investment management more trustworthy.The positive effects of fund risk and fund family size mean that China’s fund investors tend to chase gains while ignoring risk,they prefer large fund family ’s funds.We also use interactive regression method to study the characteristics of the Fund on the positive and convexity characteristics of FPR,and found that increasing age will significantly reduced the investor’s performance sensitivity when the fund’s performance is at the top levels.It is because of the fund age reduce the investor’s performance sensitivity when the fund’s performance is at the top levels,supposed the sensitivity when the fund is in poor performance level unchanged,that resulted in reduced fund FPR convexity.We also found that fund performance volatility will increase significantly in the performance level of fund investor’s inferior performance sensitivity,and significantly reduce the investor’s performance sensitivity of fund when it is in the middle performance level.Finally,we found that the fund family’s size can significantly reduce the performance of the Fund and the Fund’s sensitivity to FPR.This is because the fund family has a spillover effect,making the most of the investors to pay more attention to fund family of brands,rather than the performance of the fund itself.So the investor’s performance sensitivities of funds affiliated with large fund family’s fund are relatively low.Base on the research and depicts of fund investors behavior in our country,we use the performance sensitivity to measure investor’s behavior and research the investment decision behavior of fund managers affiliated with fund families and the internal tunneling behavior inside fund family.Funds together constitute the fund family,so analyzing the tunneling behavior of fund family should base on the investment decision-making behavior of fund managers within the family.We first illustrate the implicit incentives of fund investor’s purchase and redemption behavior on fund managers under a fixed management fee.Secondly,we use tournament models and empirical method to the incentive effects of investor’s performance sensitivity on fund manager’s efforts and fund risk.Model analysis and empirical results show that fund investor’s performance sensitivity has a positive incentive effect on the fund manager’s efforts.In addition,empirical studies also show that fund age and the stock market rate of return have negative impact on the level of fund manager’s effort.The analysisi of fund manager’s risk level investment decision show that the fund manager’s investment decisions depend on the ability of investment management.The stronger the investment ability of fund manager,the higher the level of portfolio risk.The stronger the performance sensitivity of fund when it is in the top performance level,the lower the performance sensitivity of fund when it is in the low or middle performance level,the smaller the low threshold of piecewise linear net inflows function,the higher the level of portfolio risk.Results of empirical research support the assumption that different levels of performance sensitivity of investors generate different implicit inventive on the risk decisions of fund managers.When we build the risk decision model of fund managers affiliated with fund families,we use the piecewise linear net inflows function to character the behavior of fund investor in China’s fund market.Here,we also use this same function to build fund family’s internal tunneling behavior model.Base on the fund manager’s risk decision model,we formulate fund family’s internal tunneling model by incorporating fund manager’s optimal risk decision.The analysis showed that the characteristics of the fund FPR will affect the internal tunneling behavior of fund family,such as the FPR convexity,the asymmetry of sensitivity variation,the asymmetry of performance threshold,and so on.Since the purchase and redemption behavior of fund investors decides the characteristics of fund FPR,the above results imply that fund family’s internal tunneling behavior depends on the fund investor’s behavior.We also further study the influencing factors of fund family’s internal tunneling behavior.By constructing the portfolio with high or low performance,we compare the gap of the two portfolio when they are belong to the same fund family and that of the two portfolio when they are belong to different fund families,to verify the existence of an internal tunneling behavior of fund family.Paired T test and multiple regression analysis results indicate that in the sample period,the fund family in China’s fund markets has exhibited a certain degree of internal tunneling behavior.Particularly,the older the fund,the older the fund family,the smaller the fund family size,the internal tunneling behavior within the fund family will be more significant.This study shows that the effects of fund family’s characteristics on internal tunneling behavior in domestics are different from those in abroad,which is due to the difference of fund investor behavior in domestics and abroad mature markets.The above results also imply that fund family’s internal tunneling behavior depends on the fund investor’s behavior.This paper has studied form the new perspective of fund investor by both using theoretical and empirical method,and revealed the mechanism of internal tunneling behavior inside fund family,highlighting the importance of perfecting the corporate governance mechanism from the perspective of investor’s behavior.The research results will provide useful reference for the investor to optimize the investment decision,for the fund management company to improve its internal control mechanism,for the regulatory agency to perfect regulate institution.