A Study On The Performance Evaluation Of Chinese Open-ended Funds Based On Investor Sentiment

Looking back to the20years of development history of China’s securities market, we have successfully learned mature experience from the foreign securities market and do so effectively combined with China’s national and local conditions. However, any growth of new things require a relatively long process, our securities market is still having a lot of problems. Compared to mature markets, China’s market is lack of the measure to stabilize the securities market. Many research confirmed that our securities market is not a strong-Form efficient market, which providing the conditions for noise traders, such as:serious insider trading, inadequate information reflected on the stock price, individual investors producing wrong expectations on the stock price. Because of the lack of short selling in our securities market, arbitrageurs do not eliminate the effects of noise.Behavioral finance claims that there are a lot of noise traders in the market, which falsely believe that they have special information about the future price of securities. In the modern behavioral finance, there are limits to arbitrage, so rational traders cannot defeat the noise traders. Scholars have begun to study how to measure noise traders affecting the stock returns, which often called investor sentiment in behavioral finance. Scholars confirmed that investor sentiment will produce different effects on future returns of different types of stock. Generally, when investor sentiment is high, the prices of high-sentiment stocks are inflated and the subsequent returns are lower than returns of low-sentiment stocks. In contrast, when investor sentiment is low, the prices of high-sentiment stocks are lower than they should be and the subsequent returns are relatively higher.Recent years there are more and more open-end funds in China’s securities market, so institutional investors is increasingly paying an important role. Open-end funds as investors are affected on investor sentiment in the stock market. In this paper based on the framework of investor sentiment of behavioral finance theory uses principal component analysis to build investor sentiment index from2001to2010, in order to compare the emotional behavior and the fund performance from2004to2010.The paper is divided into five parts. The first part is the introduction. The second part is the research literature review. The third part is the theoretical model. The fourth part is empirical research. The fifth part is the conclusions and recommendations of this study.Based on the research of scholars in this field we conclude that the open-end funds tend to invest in high-sentiment stocks when investor sentiment is high and invest in low-sentiment stocks when investor sentiment is low. We speculate that such behaviors of Fund may result from two reasons:First, the open-end funds invest securities with non-rational behavior; second, fund does that in order to meet market investor sentiment, attract fund investors, and increase the net fund flow. From the performance study results, this paper conclude that open-end funds that being consistently loaded on low-sentiment stocks generate a superior performance in long term. Fund sentiment loading negatively related to fund performance.By drawing on the research of scholars at home and abroad, the innovation of this paper are as follows:First, this article uses closed-end fund discount, consumers confidence index, new accounts, the market turnover, IPO first day returns and IPO first day turnover to build investor sentiment index. The more appropriate set of indicators including market sentiment information can comprehensively reflect the full market investor sentiment. Second, there is not a research using investor sentiment to study the performance of open-end funds in china. Therefore, this is the first time in China linking between behavioral finance and fund performance. Finally, t through theoretical analysis and empirical research this paper make a recommendation that investing in low-sentiment stocks is a preferred portfolio strategy.