A Study On The Skill Of Chinese Fund Managers Based On Added Value

In1998, China’s first closed-end fund came up under the strong support of the policy, after15years of rapid development, the fund has stepped into every family. Fund is an important kind of financial products for ordinary people. How to choose fund is very hard for fund investors. The Fund’s performance often depends on the fund managers’ talent or skill.The market and investors urgently need an effective method to measure fund’s performance and a comprehensive and objective system to evaluate fund managers’ skill, which is not only important to fund itself, but also conducive to the fund investors and fund regulatory agencies. It will help to guide the development of China’s fund industry, standardization of operations, to promote the standardization of China’s capital market. It can be said that the establisH-Ment of such an evaluation method is important to all market participants. Focusing on the practical problems, this paper absorbed the results of previous studies based on the actual situation in China and aimed at finding an evaluation method of managers’skill as objectively as possible to provide investors a valid reference of choosing funds.Based on the previous studies, I summed up the most widely accepted way to measure the fund managers’talent-α method.a is the excess return achieved by the fund, which is an important quota of fund performance. Since the excess returns came from the fund managers’ skill in past studies, a worked as the evaluation of performance and managers’ skill at the same time. But the a method is based on the CAPM which have several strict assumptions that are not supported in the Chinese market, according to the Berk and Binsbergen (2013), this paper proposed a new measure of fund managers’skill-added value. In addition, This paper points out that the fund size can be used as an index to measure managers’ skill, and attempted to find some evidence of the existing of the economic rent, in order to prove the existence of manager’s skill. Using added value to measure the managers’skill were tested in this paper, we came to this conclusion that average Chinese fund managers do have skill, and the top10%outperforming fund managers are significantly talented.This paper also compared those methods:a (both net a or gross a) is not a good evaluation of the ability of the fund manager, but as the fund performance evaluation, it is very effective. The added value V is the most effective methods. The fund size,to a certain extent, are able to measure the manager’s skill for those whose added value is in the top50%, but overall, it still has great limitations.The innovation of this paper lies in the two points below:Firstly, using the index fund return as the bencH-Mark portfolio to take place of the Carhart risk-adjusted returns, which has two benefits. One is the investors can actually invest in this portfolio. The other is, returns of index fund included the transaction costs but the risk adjusted return did not consider the transaction costs, which is often too large to dismiss. Secondly, starting from the most basic economic concept-economic rent. We argue that the size of the fund can be used to evaluate the ability of fund managers. Despite the fact that this method has certain limitations in China’s fund market, but it also presents a new idea for future research.Meanwhile, there are several regrets of this paper. Firstly, our data is not ideal, some data cannot be directly obtained from the database, and need to indirectly calculated, so it may cause error. Secondly, when using fund size as an index, there is no effective method to distinguish whether the fund manager has skill by fund size, but this method would be a good research direction, hope in the future the study can be resolved.