Does China's Open-end Fund Flows Have The "Smart Money Effect"?

After nearly two decades of development,open-end funds have become one of the increasingly important investment and financial instruments in China because of the specific advantages brought by flexible redemption.However,there is no unified conclusion whether the fund investors have made profits through the smart choosing of the funds.Zheng(1999)first proposed the smart money effect,believing that fund investors have the ability to choose funds wisely to obtain excess returns,that is,funds with net inflows in the early stage will show better future performance than funds with net outflows.But then there were doubts that such excess returns were merely the result of investors following previous performance or momentum.At the same time,the smart money effect has been pointed out to have a limited time period,as time goes on,fund flows will no longer be smart,and may even turn into dumb money.Different from the mainstream research to determine the impact of fund performance on fund investors' buys&sells in China,this paper focuses more on the reverse selection and prediction ability of fund flow on fund performance,using more classifications of time,investors and flow directions.The data refers to General Stock Funds and Partial Stock Mixed Funds from 2nd half of 2004 to 1st half of 2018.Firstly,Because the smart money effect is based on the persistence of fund performance,this paper examines the performance persistence of mutual funds in sample,and concludes that fund managers have differentiated investment management capabilities,but the performance momentum was not significantly strong until one year or more.Secondly,institutional investors show a stronger smart money effect than individuals,and the effect of redemption is bigger than that of purchasing,which is consistent with previous studies that no smart money effect had been found on the whole.At the same time,the high-low traffic strategy is not ideal due to the existence of scale effect.Finally,by comparing the reasons behind the heterogeneity of different types of investors,the excellent ability of choosing funds shown by institutional investors comes from the identification of the fund's stock selection ability.Besides,unlike individual investors following market sentiment,institutional investors play the opposite to market volatility.