Assessing Mutual Fund Performance in China

Chinese fund manager performance is interesting because, in a market dominated by speculative retail trading, we expect professional fund managers to have a persistent edge. Using data on the Chinese mutual fund industry, the authors compute a new skill measure to identify exceptional funds with persistent performance. When an equity mutual fund is in the top 1% of their ranking in a particular 6-month period, the probability the fund will be among the top 10% in return in the following period is 22%. By comparison, for funds that rank in the top 1% by past 6-month return, the probability of being a top 10% fund in the next 6 months is only modestly better than noise at 12%. The authors also find declining skill and performance persistence at the industry level, likely driven by the exodus of mutual fund managers to hedge funds. They provide evidence that most of the outperforming funds in China deliver excess performance, relative to peers, through market timing. Funds that reliably pick winning stocks often do not have evidence of performance. This may be related to a mutual fund management culture that emphasizes market timing for managing downside risk over a focus on relative performance. TOPICS:Mutual fund performance, emerging markets, manager selection Key Findings • The authors develop a new mutual fund skill measure that identifies exceptional funds with persistent performance and assesses stock selection and market timing ability. They then apply this measure to Chinese mutual funds. • They demonstrate that some Chinese mutual funds exhibit persistent skill but that industry-wide skill is declining over time—likely because of a migration of the most talented managers from mutual funds to hedge funds. • The authors show that most exceptional Chinese mutual funds deliver excess performance relative to peers through market timing as opposed to stock selection, a finding consistent with management culture emphasizing downside risk management over relative returns.