Analysis On Mutual Fund's Investment Styles In China

For eight years since the promulgation of "The Provisional Management Measure on Securities Investment Funds" in November 1997, China's security investment funds have being growing rapidly into one of the largest institutional investors in capital markets. The size of the funds witnessed exponential growth. The category of funds was also increasing rapidly. The investment style became more and more diversified especially after the birth of open-end funds. As the mutual fund industry continues to grow, the study on how to correctly classify and evaluate the investment style as well as to examine the consistency between the stated investment style and the actual performance.The thesis begins with a review of the development of mutual fund industry in USA and China. The evidence indicates that after the fund management industry enters into a mature stage, the product differentiation and market segmentation have become the major competitive strategies among fund management companies. Then, the Morningstar's methodology is applied ex ante to classify the investment styles of close-end funds and open-end funds. Next, RSA and PSA methods are used ex post to classify the mutual funds into different styles. Finally, I compared the ex post classification with the ex ante classification to examine the consistency of investment style. The comparison shows that the majority of mutual funds significantly deviate from their stated investment styles. A further analysis justifies my hypothesis that due to information asymmetry, the fund managers may behave in favor of their own interests at the cost of the fund investors. Under the pressure of performance evaluation and in consideration of personal career, the fund manager may also try to outperform the benchmark by shifting the investment style. However, the empirical evidence indicates the contrary that the funds shifting style have underperformed the funds sticking to their style. As a result, if the funds shift the investment style without notice to the investors, they have effectively impaired the interests of fund investors.We have made horizontal comparisons for mutual fund performance in each reporting period and found that mutual funds tend to converge in investment style, timing and strategy. The herd behavior theory can be used to explain this phenomenon. But the convergence of investment style has led to indifferent products and higher risks for investors, fund managers and even the capital market. In the end, I addressed several problems in the existing fund style classification system and investment style management. I further proposed some measures to resolve these problems.