Research On Investment Management Capabilities Of Active Fund Managers

Mutual funds are the main institutional investors in China’s capital market and an important tool for residents to conduct wealth management.China’s mutual fund industry sprouted in the early 1990s.After more than two decades of development,China’s public fund industry has grown from scratch,from small to large,and the number and scale of public fund products have achieved leapfrog development.Eyecatching results.As of the end of 2020,the number of public offering fund products in China has exceeded 7,000,and the fund size has exceeded 20 trillion yuan.While accelerating development,new opportunities and challenges have also emerged in the public fund industry.From the perspective of fund products,the number and scale of actively managed funds have always been dominant in China’s public fund market.In recent years,with the inclusion of A-shares in international indexes,the accelerated opening of the financial industry,and the establishment of the third pillar of pension funds,the concept of passive investment has been promoted,and the corresponding investment demand has gradually increased.In this context,the number and scale of passively managed fund products have shown an increasing trend,and the competition between actively managed funds and passively managed funds has become increasingly fierce.From the perspective of fund managers,star fund managers have always been sought after by investors,but the "roller coaster" market for fund performance is often staged.Even for funds with annual performance winners,their performance in the second year often underperforms the industry average.From the perspective of fund investors,although many actively managed funds can create considerable returns,the profit experience of fund investors is not good."Funds make money,but the citizens do not make money" have always been a pain point in the mutual fund industry..At present,China’s capital market is advancing reforms on the investment side.Regulators have repeatedly emphasized cultivating and expanding the management team of mutual funds and enhancing the investment management capabilities of public fund managers.In this context,the investment management capabilities of active fund managers have become the focus of market attention.This article aims to examine the investment management capabilities of active fund managers.The first question to be studied is whether active fund managers have investment management capabilities?Active funds rely on the fund manager’s ability to select stocks for active management,and strive to obtain yields that exceed performance benchmarks.Existing research usually uses the excess return relative to the benchmark to measure the investment management ability of active fund managers.At the theoretical level,on the one hand,according to the principle of accounting equilibrium,if market returns are used as a benchmark,the overall excess return rate of active investment should be zero.If the active fund can obtain the entire excess return,then the excess return of the remaining active investments should be negative.On the other hand,according to the efficient market theory,active fund managers cannot obtain excess returns based on available information.Therefore,active fund managers do not have investment management capabilities in an efficient market.Although theoretical analysis believes that it is difficult for active funds to obtain excess returns,the results of related empirical studies are divided.Early foreign empirical literature shows that active fund managers do not have investment management capabilities.However,with the update of data and the enrichment of testing methods,many empirical literatures have proposed that active fund managers have investment management capabilities.Unlike the situation abroad,China’s capital market started late,the market efficiency is relatively low,and the regulatory system and institutional norms are gradually improving.Based on this,it is necessary to explore the investment management capabilities of active fund managers in China.In the case of information asymmetry,how investors can identify active fund managers with investment management capabilities is also a question worthy of discussion.In the existing literature abroad,there are two main ways to identify the investment management ability of fund managers:one is to use fund performance,such as investigating the continuity of fund performance;the other is to use fund holding information,such as investigating the industry concentration of fund holdings degree.Different from foreign public fund markets,all the position details of Chinese mutual funds are only disclosed in the semi-annual and annual reports,and only the top ten heavy positions are disclosed in the quarterly reports.Therefore,the identification method using fund holding information may not be suitable for Chinese public offerings.fund.In 2017,the first batch of publicly offered FOFs（funds in funds）were officially issued.Unlike ordinary public funds,FOF’s investment targets are fund products.As a professional fund investor,FOF has the following two advantages:First,FOF is selected by professional fund managers and researchers to invest in funds;Second,FOF can obtain information that ordinary fund investors cannot know.The above analysis shows that funds that are heavily held by FOF are more likely to obtain higher excess returns,and FOF holdings provide the feasibility for identifying the investment management capabilities of active fund managers.As an important participant in the fund market,the perception of fund investors is also worthy of attention.In the face of fund performance,how will investors recognize the investment management capabilities of fund managers?Existing studies generally assume that the cognition of fund investors follows the Bayesian process,that is,investors update their cognition of fund managers’ investment management capabilities based on the fund’s past performance.But in actual investment,fund investors often show irrational short-sighted investment behavior,behavioral finance provides a possible explanation for this.The reference point theory believes that investors will choose a reference point as a benchmark when making decisions under uncertain conditions.In fact,due to the information asymmetry between investors and fund managers,investors cannot know the true investment management capabilities of fund managers.Therefore,investors are likely to use the fund’s past performance as a reference point to form expectations of fund managers’ investment management capabilities,which in turn will affect investors’ perception of fund managers’investment management capabilities.This article mainly includes three aspects:the first is to test the existence of active fund managers’ investment management capabilities;the second is to examine the identification methods of active fund managers’ investment management capabilities;the third is to explore the investment management capabilities of active fund managers.Cognition.The specific content is as follows:Chapter 1 is the introduction,which mainly introduces the research background and significance of the selected topic,research ideas and content,as well as research methods and innovations.Chapter 2 is a literature review.This article first sorts out the evaluation methods of active fund managers’ investment management ability.Then,this article expounds the existence of active fund manager’s investment management ability from two perspectives:theoretical analysis and empirical research.Then,this article summarizes the methods of identifying the investment management ability of active fund managers in existing research,and compares relevant domestic and foreign researches.In addition,this article outlines the factors that influence the investment management capabilities of active fund managers.Finally,this article reviews the research on investors’ perception of the investment management capabilities of active fund managers.Chapter 3 examines whether active fund managers have investment management capabilities.This paper uses factor model method and bootstrap method to empirically test the investment management ability of active fund managers in China.The empirical results show that in the factor model test,the results of the equal-weighted average portfolio show that the sample funds can obtain excess returns,while the results of the weighted average portfolio are the opposite,indicating that compared with large-scale funds,the investment management ability of moderate-scale fund managers better.In the self-sampling method,whether it is based on the methods used by KTWW（2006）or FF（2010）,the results show that the sample fund managers have investment management capabilities.Moreover,in the sub-sample inspection of the self-sampling method,the active fund managers of the medium scale（500 million to 5 billion yuan）performed best.In general,the results of this article show that my country’s active fund managers have investment management capabilities and can obtain excess returns,but there is a diminishing return to scale effect.Chapter 4 examines how to identify active fund managers with investment management capabilities.This article proposes a new method to identify the investment management capabilities of active fund managers from the perspective of FOF holdings.Taking China’s open-ended active equity funds as a sample,this article examines the ability of FOF heavy holdings to predict the future returns of the fund.The research found that:First,FOF holdings can positively predict the future return of the fund.Compared with funds not held by FOF,funds held by FOF holdings have higher future returns,indicating that FOF can identify the investment management ability of the underlying fund manager.;Second,compared with the internal FOF holdings,the external FOF holdings can better predict the future return of the fund,indicating that the internal FOF holdings may be to increase the scale of fund products and carry out the transfer of benefits within the fund family.The external FOF holdings are to obtain investment income;third,FOF new holdings can also predict the future return of the fund,indicating that FOF’s new holdings reflect the FOF’s judgment on the investment management capabilities of the fund managers.Chapter 5 examines how investors perceive the investment management capabilities of active fund managers.Based on behavioral finance,this article finds that investors’ expectations will affect their perceptions of fund managers’ investment management capabilities.Specifically,investors will form expectations on the fund manager’s investment management ability based on the fund’s past performance.If the fund’s performance is higher than expected,investors will have a more positive perception of the fund manager’s investment management ability,and if the fund’s performance is lower than expected,The perception of investors is even more negative.This article uses the ranking changes of fund performance to measure the degree of contrast between fund performance and investor expectations,and examines the impact of expected contrast on investor perceptions.The study found that after controlling the absolute ranking of fund performance,if the fund performance is higher than investors’expectations,the fund redemption units will decrease;conversely,if the fund performance is lower than investors’ expectations,the fund redemption units will increase.On this basis,this article further finds that the greater the volatility of fund performance and the lower the proportion of individual investors holding,the more significant the impact of expected contrast on investor perceptions.Finally,the impact of expected contrast on investor perceptions has no correlation with the fund’s future returns.The innovations of this article are mainly manifested in the following aspects:First,this article uses the factor model method and the bootstrap method to comprehensively test the investment management capabilities of active fund managers.The current research is mainly based on commonly used factor models for testing,but the excess return of funds obtained by the factor model method may not represent the investment management ability of the fund manager.Even if the active fund manager does not have the investment management ability,he may get excess returns due to good luck.The self-sampling method simulates the excess return of the fund with the help of the replacement and re-sampling in statistics,thereby separating the luck and strength in the excess return of the fund.Therefore,the self-service sampling method can more accurately test the investment management capabilities of active fund managers.Second,this article proposes a new method to identify the investment management capabilities of active fund managers from the perspective of FOF（funds in funds）holdings.At present,many researches construct identification indicators based on fund holding information,such as investment industry concentration and investment enthusiasm.However,the full position details of domestic public funds are only disclosed in the semi-annual and annual reports,and the quarterly reports only disclose information on the top ten major positions of funds.Therefore,the position information disclosed by the fund will have the problem of information lag,and the use of fund position information may not be able to accurately identify the investment management capabilities of active fund managers.Not only that,in order to avoid the disclosure of position information,fund managers may also adjust positions on the deadline for the disclosure of position information to cover up the true investment intentions.Compared with ordinary fund investors,FOF has a professional investment research team to select funds,and may also obtain private information that ordinary investors cannot obtain.Using FOF to identify active fund managers with investment management capabilities can avoid the above problems and make it easier for investors to practice.Third,this article examines investors’ cognition of active fund managers’investment management capabilities from the perspective of behavioral finance.Most studies believe that investors’ perceptions of fund managers’ investment management capabilities follow the Bayesian process,but in practice,fund investors often exhibit irrational investment behaviors.The reference point theory in behavioral finance believes that investors will choose a reference point as a benchmark when making decisions under uncertain conditions.Due to the information asymmetry between investors and fund managers,investors’ perceptions of fund managers’ investment management capabilities are uncertain.Therefore,investors may use the fund’s past performance as a reference point to form expectations on fund managers’ investment management capabilities.Based on the theory of reference points,this article supplements the deficiencies in the cognitive field of fund investors.