Fund Flow,Performance And Investors' Concerns

This paper studies how investors evaluate mutual fund performance when choosing actively managed mutual funds in China.Using fund:flow as a proxy for investment behavior,this paper finds that investors generally tend to adjust fund raw returns based on risk,and use risk-adjusted returns to judge fund managers' skills,which directly effect on their investment decisions.Of all the performance evaluation models,external ratings(e.g.Morningstar),market-adjusted returns,and CAPM model explain the fund's fund flow best,but there is no evidence of which performance evaluation model investors prefer.After decomposing fund returns into alpha and factor-related returns,further evidence show that investors really care about return components,for instance,they do concern about alpha compared with returns from market risk.In addition,this paper also finds evidence that institutional investors chase 5-star rating funds,and they could clearly distinguish return components with the help of multi-factor models and act after alpha.However,individual investors could only distract market return from raw return to guide their investment.In the section sampling,this article selects actively managed stock-based open-end funds with at least 3 years of historical performance from 2005 to 2019.In terms of data,this article summarizes various return rates of the sample funds and introduces weighted-lagging returns to solve the mismatch between quarterly and monthly data.In the empirical stage,this article first tests the simple relationship between the historical returns and the fund flows.By observing correspondence between the positive returns and the positive fund flows,it was found that investors as a whole would make risk adjustments to fund performance.Then,group tests further prove that the market risk adjusted return rate has the best effect on explaining the fund flows.However,by decomposing the fund return,this article finds that the risk-factor return abnormal return both can explain flow funds well.Further research finds that different investors have different attitudes towards risk-factor returns-professional investors can basically distinguish the source of fund return while non-professional ones only take market returns into account.This result is consistent with the first two experimental results that the market-adjusted return(the return after excluding market factor)has the best effect on explaining the fund flows.In the section of robustness test,this paper uses the time-varying cross-sectional test and Bootstrap test to verify the robustness of the conclusion,and the results support the empirical conclusion.By analyzing the behavior of the two types of investors,fund companies can set different strategies and marketing programs for different investors.For example,for institutional investors,they can show the ability to obtain abnormal returns,while for individual investors,products should show the outperformance over the market,which may help the fund issue and net positive fund flow.