Research On The Star-Fund Effect Of Chinese Fund Families

With the continuous rapid development of the fund industry and the expansion of market in China, the development of the fund industry shows some characteristics of the family management. However, due to the short history of the fund industry in China, there is still relatively limited research on the fund industry, lacking analysis on the behavior pattern of the fund family. Therefore, this paper will conduct an in-depth exploration on the operation law of the fund market and the behavior pattern of the fund family based on the rapid development of the fund industry, the significant increase in the number of fund families and the increasingly fierce competition between fund families in recent years.First, this paper theoretically analyzes the motivation of fund family’s strategy building a star fund with superior resources concentration so as to expand the size of the fund family, and then theoretically analyzes the reason that the net capital inflows is positively correlated with the current performance, while negatively correlated with the standard deviation of performance and the reason that there is a spillover effect of the star fund in the fund family. The star fund performing well not only creates more capital inflows, but also has a spillover effect which can create more capital inflows for other funds under the same fund family. This phenomenon makes the strategy building a star fund feasible. The theoretical analysis is divided into three parts.I. The motivation of fund family’s strategy building a star fund with superior resources concentration so as to expand the size of the fund family is theoretically analyzed from the perspective of the theory of information asymmetry. There is serious information asymmetry between fund investors and fund managers. In general, the latter possesses more information on the fund product than the former and they have the relationship of principal and agent. Fund investors want to get more performance returns, while fund managers hope to expand the size of the fund families as much as possible. The inconsistency between their interests may lead to moral hazards. Fund managers, based on their own interests, seek for the size maximization of the fund families in order to maximize the benefit of the families. However, the way to build a star fund with superior resources concentration may create more capital inflows for the fund family to help it expand its scale.II. The relationship between the net capital inflows of fund and the current performance as well as the standard deviation of performance is analyzed from the perspective of modern security portfolio theory.The current performance of the fund may reflect the investment management capabilities of fund managers to a certain extent. If a fund performs outstanding currently, it may reflect that the fund manager’s investment management capabilities should be excellent to some extent, so the expected returns would be relatively high. Therefore, if the current performance of a fund is outstanding, investors may reasonably expect excellent future performance and will purchase this fund, causing large capital inflows. Therefore, there is a positive correlation between the current fund performance and net capital inflows. The more excellent performance will cause more net capital inflows; while the poorer fund performance may result less net capital inflows, even net capital outflows (i.e., negative net capital inflows).Fund risk can be measured with the yield variance or standard deviation. The larger standard deviation presents higher risk. Most investors are risk averters (also, a few of investors are risk neutrals or risk appetites). If the fund risk is too high, or the investment income from fund can’t compensate for the risk they assume, investors will redeem this fund substantially, resulting in net capital outflows. Therefore, the standard deviation of fund performance is negatively correlated to the net capital inflows. The greater the standard deviation of fund performance is, the higher the risk will be and the more the capital outflows will be; the lower the standard deviation of fund performance is, the steadier the fund performance will be, the lower the risk will be and the less the capital outflows will be.III. The reason for the spillover effect of the star fund in the fund family is analyzed by using the relevant theories of halo effect from the perspective of investors’psychology. The general fund investors lack understanding of the fund family; besides, a star fund in a fund family means a notable stimulus to the general fund investors who pay close attention to the performance of the fund and attracts more attention of investors, thus there may be deviation in the perception and judgment on the fund family to the fund investors. If there is a star fund in a fund family, it may express that the star-fund managers have strong investment management capability, then investors may extend the halo of the star fund to the entire fund family and believe that not only the star-fund managers have strong investment management capability, but also the entire fund family where the star fund stays. As a result, fund investors may purchase all the funds under the same star-fund family, but not only buy the star fund. So fund investors are affected by the halo effect, causing the spillover effect of the star fund.Then this paper enters into the empirical part. In this part, we firstly use the panel data to carry out empirical test on the spillover effect of the star fund in the fund family and then on the effect that the falloff of the star-fund performance brings to the capital flow of the fund family in order to verify whether the star fund after performance falloff will bring significant capital outflows to the fund family. If there is a spillover effect of the star fund and the star fund after performance falloff doesn’t bring significant capital outflows to the fund family, there is a motivation for the fund family to build a star fund with superior resources concentration and the star fund is not required to keep the outstanding performance for a long term. Through the empirical test, we find that the star fund not only creates more capital inflows, but also has a spillover effect which can create more capital inflows for other funds under the same fund family. However, assuming that the star fund rises in Quarter t (same as below), its capital inflows often happen in Quarter t+1, while for the star-family funds, their capital inflows often happen in Quarter t+1. It may be related to the different transmission speed of different signals. In addition, the ratio of net capital inflows and the standard deviation of the fund performance are negatively correlated, which is consistent with the theoretical analysis. In the Quarter t+1, the star fund in Quarter t hasn’t significant capital outflows, but the star-family funds in Quarter t have significant capital inflows. In Quarter t+2, there are significant capital outflows for the star fund in Quarter t, but the ratio of capital outflows is much lower than the ratio of capital inflows in Quarter t, while the star-family funds have no obvious capital outflows. In all, it is feasible for the fund family to build a star fund with superior resources concentration in a short term, and the performance of the star fund is not necessary to be maintained at the star level for a long period.Then, we take an inspection on the relationship between the performance of the star-fund family and the performance of the star fund. If the performance of the star fund increases while the performance of the star-fund family decreases, the phenomenon that the fund family builds the star fund with superior resources concentration in a short period exists. Given the definitions of the influential fund and the influential fund family, the empirical results show that there is a positive correlation between the overall performance of the influential fund family and the performance of the influential fund within the family. The increase in performance of the influential fund also promotes the overall performance of the entire fund family. However, empirical results show that a small part of the fund families still adopt the strategy building a star fund with superior resources concentration to maximize the family’s interests.Since there are a small part of the fund families who adopt the strategy building a star fund with superior resources concentration to maximize the family’s interests, we may have a question that the fund family with what characteristics prefers to use this strategy. We adopt the logit model to verify whether there is a correlation between the probability of the star-fund appearance in a family and some characteristic variables of the fund family in order to identify the characteristics of the fund family preferring to adopt the strategy to create a star fund. According to the empirical results, no matter of the overall performance of the fund families, the fund families that the performance differences of the various funds in the same family are great and there are a large number of funds in the same family have a higher probability of the star-fund appearance. For such a fund family with those characteristics, if its overall performance is poor and it has no star fund in a long period, it is likely to build a star fund with superior resources concentration, and the motivation to build a star fund is stronger.At the end of the empirical part, we have a statistical analysis on the star performance’s continuity of the star fund in reality in order to inspect whether the star fund can maintain its excellent performance in a long period and to verify whether the fund family concentrates superior resources to build the star fund is short-term behavior. The statistical results show that the vast majority of the star funds only serve as the star fund for a time within the statistical range and are hard to maintain their excellent performance in the long period. According to this phenomenon, on the one hand, the performance of a fund is affected by many factors and is hard to remain the star for a long time; on the other hand, the behavior of some fund families to build the star funds with superior resources concentration to attract investors and bring more capital inflows is just short-term behavior and the excellent performance of the star fund can’t be maintained for a long period.Finally, we summarize the research and make appropriate suggestions, including the suggestions on the fund management fee and policy.The main innovations of this paper include:First, the spillover effect of the star fund is explained with the relevant halo effect theory from the perspective of investor psychology.Second, an empirical test on the effect that the star fund in Quarter t brings to the capital flows of the fund family in Quarter t and Quarter t+1is carried out. The inspection time is extended to two quarters, not only limited to Quarter t+1that the previous literature usually inspected.Third, an empirical test whether the star-fund performance falloff will bring significant capital outflows to the fund itself and its family is carried out to inspect whether the motivation of the fund family to adopt the strategy to build a star fund with superior resources concentration exists and whether the excellent performance of the star fund is necessary to be maintained in a long period or not. Assuming that the star fund rises in Quarter t, the inspection time is the next two quarters, that is, Quarter t+1and Quarter t+2. Fourth, an empirical test on the relationship between the overall performance of the star-fund family and the performance of the star fund is carried out, based on the definitions of the influential fund and influential fund family, aiming at investigating the continuous relationship between the performance of the star fund and the performance of the star-fund family. If the performance of the star fund increases while the performance of the star-fund family decreases, the phenomenon that the fund family builds the star fund with superior resources concentration in a short period exists.Fifth, the statistics on the repetitive frequency of the star funds are carried out in order to examine the continuity of the star performance of the star fund and whether the star fund can maintain its excellent performance in the long period. Also, whether the behavior of the fund family to build the star fund with superior resources concentration is short-term behavior is verified.