Relationship Between Fund Performance And Investor Confidence

Today, C hina's fund industry has reached the level of "a grand fund-country" in terms of asset size or the number of funds.But transnormal development also left many problems to be solved. Different from foreign scholars having researched for decades about problems of funds, domestic academic research in this field has just started for few years.This paper first briefly introduces the history of western industry and the current situation of China's fund industry. Then this paper chose Growth of Huaxia(000001)for case analysis to study the relationship between the fund performance and fund flow.Case analysis showed that Growth of Huaxia(000001) performed like what's been described as "redemption paradox". Case analysisalso showed that Investors behaviors could affect the fund performance through cash ratio,which partly explainedwhy Growth of Huaxia(000001)couldn't outperform the market index in a bull market butfell much less than the market index in a bear market.By using the balance panel data to establish a dynamic panel data model,empirical analysis also studied relationship between fund performance and investor confidence. Estimated through Difference-GMM method, the results showed that there's causal relationship between the fund performance and investors' confidence. Investor confidence laid influence to the fund performance by changing the proportion of cash in the fund asset and promptingfund managers to adjustportfolio. Fund performance, on the other hand, affected investor confidence through the performance level and market expectations. The results of the empirical analysis showed that the increase of the proportion of cash could have a negative dilution effect on fund performance. This dilution effect is greater than the positive effect resulted from the increasing o fthe proportion of cash,which will reduce the funds liquidity restrictions.What is more, the change of the portfolio tend to be bad for fund performanceifif it is caused by investor confidence.Because in these situations, fund managers may benot rational enough to adjust the portfolio of the fund since they are in a hurry.At the same time, the change of fund performance canaffect investor confidence from two aspects too. First, the level offund's income can affect investor confidence. Second, the marketexpectationsaboutfund performance will also change investor confidence.The conclusions of this paperare of great importance while fund managers adjust the asset structure of fund.