Empirical Study On Investment Style Of Open-end Stock Funds In China

Mutual fund has developed rapidly in resent years. Thanks to the successful reform of equity ownership in 2005, mutual fund has been a popular investment instrument for Chinese people, and playing a more important role in stock market. Ranking only based on grow rate of net asset value is no longer being considered as an accurate way, because it ignores the risk factors. Study on investment style is helpful to explain the sources of fund income, and make right judgment on fund performance. This paper aims to analyze the application of investment style theories on Chinese security market and find out characteristics of investment style on Chinese funds.Value-growth factor and size factor are used to classify styles on mutual funds, because there are significant anomalies on P/B factor and size factor both in mature markets and emerging markets. This classification has been considered as a proper way on many researches.Based on this classification, 47 open-end stock funds, which were established for more than 3 months on Jan 1^st, 2005, are used as study samples. Introducing Fama-French 3-factor model and Sharpe Asset Class Factor Model to analyze investment style, empirical results show that, (1) according to 3-factor model, there are 4 styles on Chinese open-end stock fund market, including large cap & balance, large cap & growth, mid cap & balance, mid cap & growth. However, according asset class factor model, most funds belong to large cap & balance group. (2) Although investment style chosen by fund managers is almost the same, however, it is rather rational because it is the best choice when taking both risk factor and return factor into consideration. (3) There are large differences on the results through these models. Only 13 mutual funds belong to the same style. After eliminating effects on the difference of reference portfolio and classification standard in two models, the difference is still very obvious. (4) The result from 3-factor model is more consistent with the declared style of the fund, however, we cannot make the decision that 3-factor model is a more accurate one to judge investment style.