The Research Of Portfolio Manager Incentive In Chinese Security Funds

Portfolio manager is the key person in the operation of an investment fund, who has a great impact on fund performance. Recently, "herd behavior" and "black screen" take place frequently in the fund industry in China that indicates the loose systems of balance constrain and supervision. Therefore, it is of vital importance to apply incentive mechanism to protect the interest of stakeholders and avoid "moral risk" among portfolio managers. However, there is a lack of further theory and methold research into the incentive problems of portfolio managers in China.The incidents of "herd behavior" and "career concerns" of portfolio managers indicate that the current incentive metholds of portfolio manager are not working ideally, even contorted. So we should check its validity over again. The paper examines the influence of incentive metholds on portfolio managers and fund performance, with an eager to find out the key factors in the contortion of the incentive metholds and suggest a new reform based upon it.This paper pays attention to incentive problems of portfolio managers and analyses three kinds of incentive metholds. It consists of managerial fees, the most closely related incentive methold; reputation, implicit and long time incentive methold; relative performance ranking, the tournament incentive methold in investment fund industry. Moreover, the paper tries to uncover the veil of the impact that incentive mechanism having on the investment behavior of portfolio managers.Firstly, this paper examines the most closely related incentive methold—explicit incentive. We analyze the effect of linear incentive covenant based on the managerial fees with the introduction of a square utility function and CAPM. The research documents that this linear incentive covenant results in a lower pay-out level of portfolio managers than what investors expect. When the risk-aversion degree of portfolio managers is higher than that of investors, the risk level chosen by the former will be higher than the latter expect. The regression of RTN, Jensen index andσ,β reports a significantly negative relation between fund size and fund return and asignificantly positive relation between fund size and the total risk.Secondly, this paper examines the incentive effect of reputation. The fund industry in China is characteristic of a frequent turnover among portfolio managers. Sothe paper analyzes the incentive effect of negative reputation. After taking Tu >SectorDeviationjt, BetaDeviationit and so on into a regression, the result shows thatfund performance in present year is the key factor which results in negative reputation, and the possibility of facing negative reputation is larger for those unsuccessful managers who take on more adventurous strategy with less working experience. With the hope of reducing the probability of negative reputation, these managers mentioned above will follow those managers with rich experience. Therefore, the "herd behavior" emerges. The career characteristics of portfolio managers in China, that is short-term and venturous, determine the lack of impetus to establish reputation.Thirdly, this paper examines the influence of relative performance ranking on portfolio manager portfolio risk choice. With the method of RTN and RAR, the results indicate managers with poor performance are not inclined to increase the risk-adjusted ratio, while it is the opposite of managers with good performance. Furthermore, on one hand, winners of entrenched and large fund increase portfolio risk while new and small portfolio managers decrease the volatility; on the other hand, all the losers tend to imitate the winners who are according to their same type. That results in "herd behavior". The key reason lies in the differences of fund size, foundation time and managers' ability. The indexes in the ranking do not reflect the risk level of the fund. So relative performance ranking is short of the premise to exert the incentive impact effectively.In the fourth, we propose an innovation and perfect means of portfolio managers' incentive methold. At first, reforming the managerial fees' incentive methold, that is to establish excess performance reward accumulated fees' methold based on residual claims and risk-share mechanism according to performance award. Then, consummating reputation incentive methold, that is to establish stock ownership incentive methold based on control power, inspire portfolio managers to invest on reputation and foster perfect professional market of portfolio managers. Finally, establishing and consummating relative performance ranking, that is to set up longitudinal and latitudinal system of relative performance evaluation and complete and objective system of performance evaluation indexes, what is more, develop fund-ranking institution.In the end, this paper puts forward systems of balance constrain and supervision to ensure the incentive's effectiveness. The balance constrain mechanism includes the constitution and consummation of the system of independent directors and trusteecommittee. Moreover, it is imperative to consummate the government monitor system and industry self-discipline organization.