Skip to main content
SpringerLink
Log in

Performance and Persistence in Performance of Actively Managed Chinese Equity Funds

  • Original Article
  • Published:
Journal of Quantitative Economics Aims and scope Submit manuscript

Abstract

The aim of this study is to analyze performance of mutual funds of biggest emerging economy i.e. China. Examining Chinese mutual funds’ performance provides an opportunity to assess the ability of fund managers to outperform the benchmark market. We study the equity mutual funds of China by taking the sample of 707 funds for the period from 2004 to 2015 and evaluate their performance using Capital Asset Pricing Model, Fama–French three factor model and Carhart four factor model. It is found that mutual funds in China give better return than the benchmark market return which means that active management pays better than passive management in mutual fund industry. Moreover, this study also investigates the existence of persistence in the performance of mutual funds and findings indicate that mutual funds in China are not consistent in their performance. Winner (Top-Performing) funds of last year do not continue to be winner funds in the following year and loser funds of previous year give better return in the following year. Overall findings indicate the non-existence of persistence in the performance of Chinese mutual funds.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. In US, there were 26,708 funds at the end of year 2009, out of which 9713 funds were domestic equity funds and if those funds are excluded who invest less than 50% in common shares, the remaining funds were still 9204 whereas in China, the number of actively managed equity funds were fewer than 350 in year 2009 (Jun et al. 2014).

  2. http://www.resset.cn.

  3. Survivorship bias is a big issue in empirical research of asset pricing. If inactive or liquidated funds are excluded from the sample, return on mutual funds exhibit upward bias. Mutual funds near to liquidation show inferior performance, otherwise they will survive successfully. Their omission results in the upward bias of mutual funds’ return (Brown and Goetzmann 1995).

  4. US mutual funds witness the compounded annual growth rate of 16% between 1980 and 2007 (Wahal and Wang 2011). Jun et al. (2014) find that Chinese mutual funds grow at 52.4% (compounded annual growth rate) from 2004 to 2009.

References

  • Abdel-Kader, M., and K.Y. Qing. 2007. Risk-adjusted performance, selectivity, timing ability, and performance persistence of Hong Kong mutual funds. Journal of Asia-Pacific Business 8 (2): 25–58.

    Article  Google Scholar 

  • Agarwal, V., and N.Y. Naik. 2000. Multi-period Performance Persistence Analysis of Hedge Funds. Journal of Financial and Quantitative Analysis 35 (3): 327–342.

  • Allen, D.E., and M.L. Tan. 1999. A Test of the Persistence in the Performance of UK Managed Funds. Journal of Business Finance & Accounting 26 (5–6): 559–593.

    Article  Google Scholar 

  • Avramov, D., and W. Russ. 2006. Investing in mutual funds when returns are predictable. Journal of Financial Economics 81: 339–377.

    Article  Google Scholar 

  • Barras, L., O. Scaillet, and R. Wermers. 2010. False discoveries in mutual fund performance: measuring luck in estimated alphas. Journal of Finance 65: 179–216.

    Article  Google Scholar 

  • Benos, E., and M. Jochec. 2011. Short term persistence in mutual fund market timing and stock selection abilities. Annals of Finance 7 (2): 221–246.

    Article  Google Scholar 

  • Berk, J.B., R.C. Green, and V. Naik. 2004. Valuation and return dynamics of new ventures. Review of Financial Studies 17 (1): 1–35.

    Article  Google Scholar 

  • Bialkowski, J., and R. Otten. 2011. Emerging market mutual fund performance: Evidence for Poland. The North American Journal of Economics and Finance 22 (2): 118–130.

    Article  Google Scholar 

  • Bollen, N.P.B., and J.A. Busse. 2005. Short-term persistence in mutual fund performance. Review of Financial Studies 18: 569–597.

    Article  Google Scholar 

  • Brown, S.J., and Goetzmann, W.N. 1995. Performance persistence.Journal of Finance 50 (2): 679–698.

  • Brown, K.C., and F.K. Reily. 2009. Analysis of investments and management of portfolios. Singapore: South-Western Cengage Learning.

    Google Scholar 

  • Busse, J., A. Goyal, and S. Wahal. 2010. Performance and persistence in institutional investment management. Journal of Finance 65: 765–790.

    Article  Google Scholar 

  • Carhart, M.M. 1997. On persistence in mutual fund performance. The Journal of Finance 52 (1): 57–82.

    Article  Google Scholar 

  • Casarin, R. 2002. Italian Equity Funds: Efficiency and Performance Persistence. University of Venice. Working Paper.

  • Chen, Z., and P. Xiong. 2001. Discounts on illiquid stocks: Evidence from China. Yale ICF Working Paper, 00-56. http://faculty.som.yale.edu/zhiwuchen/EmergingMarkets/ChenXiong.pdf.

  • Chieh-TseHou, T. 2012. Return persistence and investment timing decisions in Taiwanese domestic equity mutual funds. Managerial Finance 38 (9): 873–891.

    Article  Google Scholar 

  • Christensen, M. 2013. Danish mutual fund performance. Applied Economics Letters 20 (8): 818–820.

    Article  Google Scholar 

  • Cumby, R.E., and J.D. Glen. 1990. Evaluating the performance of international mutual funds. The Journal of Finance 45 (2): 497–521.

    Article  Google Scholar 

  • Droms, W.G., and D.A. Walker. 1994. Investment performance of international mutual funds. Journal of Financial Research 17 (1): 1–14.

    Article  Google Scholar 

  • Elton, E.J., M.J. Gruber, S. Das, and C. Blake. 1996. The persistence of risk-adjusted mutualfund performance. Journal of Business 69: 133–57.

    Article  Google Scholar 

  • Eun, C.S., R. Kolodny, and B.G. Resnick. 1991. US-based international mutual funds: A performance evaluation. The Journal of Portfolio Management 17 (3): 88–94.

    Article  Google Scholar 

  • Fama, E., and K. French. 2010. Luck versus skill in the cross section of mutual fund returns. Journal of Finance 65: 1915–1947.

    Article  Google Scholar 

  • Fan, Y., and H.L. Addams. 2012. United States-based international mutual funds: Performance and persistence. Financial Services Review 21 (1): 51.

    Google Scholar 

  • Ferreira, M.A., A.F. Miguel, and S. Ramos. 2006. The determinants of mutual fund performance: A crosscountry study. Swiss Finance Institute Research Paper 30.

  • Ferreira, M.A., A. Keswani, A.F. Miguel, and S.B. Ramos. 2013. The Determinants of Mutual Fund Performance: A Cross Country Study. Review of Finance 17 (2): 483–525.

    Article  Google Scholar 

  • Fortin, R., and S. Michelson. 2005. Active international mutual fund management; can managers neat the index? Managerial Finance 31 (1): 41–51.

    Article  Google Scholar 

  • Gil-Bazo, J., and P.A.B.L.O. Ruiz-Verdú. 2009. The relation between price and performance in the mutual fund industry. The Journal of Finance 64 (5): 2153–2183.

    Article  Google Scholar 

  • Grinblatt, M., and S. Titman. 1992. The persistence of mutual fund performance. The Journal of Finance 47 (5): 1977–1984.

    Article  Google Scholar 

  • Gruber, M. 1996. Another Puzzle: The Growth in Actively Managed Mutual Funds. Journal of Finance 51: 783–810.

    Article  Google Scholar 

  • Guo, F. 2010. An empirical study on the performance and market timing ability of Chinese mutual funds. Journal of Harbin University of Commerce (Social Science Edition) 6: 22–27.

    Google Scholar 

  • Hayat, R., and R. Kraeussl. 2011. Risk and return characteristics of Islamic equity funds. Emerging Markets Review 12 (2): 189–203.

    Article  Google Scholar 

  • He, W., B. Cao, and H.K. Baker. 2015. The performance and market timing ability of Chinese mutual funds. Financial Services Review 24 (3): 289.

    Google Scholar 

  • Hendricks, D., Patel, J., and R. Zeckhauser. 1993. Hot hands in mutual funds: Short-run persistence of relative performance, 1974–1988. Journal of Finance 93–130.

  • Henriksson, R. 1984. Market timing and mutual fund performance: an empirical Investigation. Journal of Business 57: 73–97.

    Article  Google Scholar 

  • Huang, J., K.D. Wei, and H. Yan. 2007. Participation costs and the sensitivity of fund flows to past performance. The Journal of Finance 62 (3): 1273–1311.

    Article  Google Scholar 

  • Huij, J., and T. Post. 2011. On the performance of emerging market equity mutual funds. Emerging Markets Review 12 (3): 238–249.

    Article  Google Scholar 

  • Jiang, B.B., J. Laurenceson, and K.K. Tang. 2008. Share reform and the performance of China’s listed companies. China Economic Review 19 (3): 489–501.

    Article  Google Scholar 

  • Jun, X., M. Li, and J. Shi. 2014. Volatile market condition and investor clientele effects on mutual fund flow performance relationship. Pacific-Basin Finance Journal 29: 310–334.

    Article  Google Scholar 

  • Khorana, A., H. Servaes, and P. Tufano. 2005. Explaining the size of the mutual fund industry around the world. Journal of Financial Economics 78 (1): 145–185.

    Article  Google Scholar 

  • Kiymaz, H. 2015. A performance evaluation of Chinese mutual funds.International Journal of Emerging Markets 10(4).

  • Kosowski, R., A. Timmermann, R. Wermers, and H. White. 2006. Can mutual fund stars really pick stocks? New evidence from a bootstrap analysis. Journal of Finance 61: 2551–2595.

    Article  Google Scholar 

  • Lai, M.M., and S.H. Lau. 2010. Evaluating mutual fund performance in an emerging Asian economy: The Malaysian experience. Journal of Asian Economics 21 (4): 378–390.

    Article  Google Scholar 

  • Li, N., and C.Y. Lin. 2011. Understanding emerging market equity mutual funds: The case of China. Financial Services Review 20 (1): 1–19.

    Google Scholar 

  • Lin, W. 2006. Performance of institutional Japanese equity fund managers. The Journal of Portfolio Management 32 (4): 117–127.

    Article  Google Scholar 

  • Olivier, J., and A. Tay. 2009. Time-varying incentives in the mutual fund industry. Working paper. Social Science Electronic Publishing.

  • Otten, R., and D. Bams. 2002. European mutual fund performance. European Financial Management 8 (1): 75–101.

    Article  Google Scholar 

  • Ramos, S.B. 2009. The size and structure of the world mutual fund industry. European Financial Management 15 (1): 145–180.

    Article  Google Scholar 

  • Reid, B.K., and J.D. Rea. 2003. Mutual fund distribution channels and distribution. Investment Company Institute Perspective 9 (3).

  • Sharpe, W.F. 1964. Capital asset prices: A theory of market equilibrium under conditions of risk. The Journal of Finance 19 (3): 425–442.

    Google Scholar 

  • Shen, W.T., and X.R. Huang. 2001. An empirical study and appraisal on the performance of Chinese mutual funds. Economic Research Journal 9: 22–30.

    Google Scholar 

  • Shukla, R., and S. Singh. 1997. A performance evaluation of global equity mutual funds: Evidence from 1988–1995. Global Finance Journal 8 (2): 279–293.

    Article  Google Scholar 

  • Swinkels, L., and P. Rzezniczak. 2009. Performance evaluation of Polish mutual fund managers. International Journal of Emerging Markets 4 (1): 26–42.

    Article  Google Scholar 

  • Tang, K., W. Wang, and R. Xu. 2012. Size and performance of Chinese mutual funds: The role of economy of scale and liquidity. Pacific-Basin Finance Journal 20 (2): 228–246.

    Article  Google Scholar 

  • Tiwari, A., and A.M. Vijh. 2001. Sector Fund Performance. Henry B. Tippie College of Business, University of Iowa, Iowa City. Working Paper.

  • Treynor, J., and K. Mazuy. 1966. Can mutual funds outguess the market? Harvard Business Review 44 (4): 131–136.

    Google Scholar 

  • Tufano, P., and M. Sevick. 1997. Board structure and fee-setting in the US mutual fund industry. Journal of Financial Economics 46 (3): 321–355.

    Article  Google Scholar 

  • Wahal, S., and A.Y. Wang. 2011. Competition among mutual funds. Journal of Financial Economics 99 (1): 40–59.

    Article  Google Scholar 

  • Yu, L., and Y. Du. 2008. Stocks selectivity and market timing ability of Chinese open-end funds. Security Markets 342: 93–96. (In Chinese).

    Google Scholar 

  • Zhang, X., and S.M. Du. 2002. Can Chinese mutual funds beat the market? Journal of Financial Research 1: 1–22.

    Google Scholar 

Download references

Acknowledgements

We express our gratitude to anonymous referees for their constructive feedback.

Author information

Authors and Affiliations

  1. Institute of Business and Management, University of Engineering and Technology, Lahore, Pakistan

    Zia-ur-Rehman Rao

  2. Rennes School of Business, Rennes, France

    Tanveer Ahsan

  3. International Business School, Zhejiang Gongshang University, Hangzhou, Zhejiang, China

    Muhammad Zubair Tauni

  4. School of Management, Air University, Islamabad, Pakistan

    Muhammad Umar

Authors
  1. Zia-ur-Rehman Rao
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Tanveer Ahsan
    View author publications

    You can also search for this author in PubMed Google Scholar

  3. Muhammad Zubair Tauni
    View author publications

    You can also search for this author in PubMed Google Scholar

  4. Muhammad Umar
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Zia-ur-Rehman Rao.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Rao, ZuR., Ahsan, T., Tauni, M.Z. et al. Performance and Persistence in Performance of Actively Managed Chinese Equity Funds. J. Quant. Econ. 16, 727–747 (2018). https://doi.org/10.1007/s40953-017-0104-5

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s40953-017-0104-5

Keywords

JEL Classification

Search

Navigation