Fund Performance Persistence And Capital Flow

With continuously expanding economy and rapidly developing capital market, fund industry in China also grows very fast. Now mutual funds have played a very important role in China capital market, and have become one of the most important institutional investors. The competition among the fund management companies is increasingly fierce, so fund management companies and investors are concerned about the issue whether the performance of the fund is outstanding and whether the good performance generated by the investment companies is persistent.This paper provides a comprehensive empirical study about performance persistence of mutual fund in China, performance persistence of the fund managers, as well as the relation between the open-end fund performance and cash flows. The results show that the overall performance of the funds in persistence is good, especially the institutional investors showing obvious advantages of investment capacities. Persistence of the fund performance in the short-term is not obvious, but in a longer term the performance shows a certain degree of persistence. And the results about the fund performance using different market benchmarks are consistent.Concerning the performance persistence of mutual fund managers in China, the study demonstrates that the fund managers with a certain term have obvious advantages of investment capacities, and the average performance of the fund managers with more than two sequential quarters term is better than the average market performance. The fund managers' performance shows a certain persistence, and the investors to invest in fund managers with good historical performance make a rational choice. And the results about the fund managers' performance using different market benchmarks are consistent.As for the study about the relation between the open-end fund performance and cash flows, we found that the net inflow rate of the funds is positively related to the funds performance, the better the performance of the funds, the more the net capital inflows. The relation between the cash inflows and fund performance is the non-linear relationship of first declining then rising, that is, the investors will not only increase the purchase of the funds with good performance, but also increase the purchase of the funds with poor performance. Before we controlling for the reverse cash flow of funds, and relation between the cash outflows and the performance of the funds is the U-shaped. After adding the reverse cash flow of funds as a controlled variable, the non-linear relationship between the cash outflows and the performance of the funds still exists, but the positive correlation between the cash outflows of the best performance funds is no longer significant, that is, the existing investors are not so sensitive to the good performance funds as to the poor performance funds in redemption.