On The Performance Of China's Closed-end Security Investment Fund

Continuous expanding of security market and perfection of market mechanism lay sound foundation for further development of security investment fund. On the other hand, security investment fund developing healthily can stabilize security market and disseminate rational investment idealism and promote security market developing healthily. In China, formal security investment fund started from the closed-end fund. At the early stage, closed-end fund has an absolute superiority in the aspect of asset size. A series of events happened in 2000 and 2001 changed the development trace of security investment fund. Since 2001, the development focus transferred from the closed-end fund to open-end fund. The number, net total asset and market share show a downward trend, so the closed-end fund continue to be marginalized and even face the danger of disappearing. Meanwhile in the eyes of many investors and even some researchers, closed-end fund has internal governance defect and operates in low efficiency. The aim of this article is to evaluate closed-end fund objectively, comprehensively and scientific through empirical study in order to help people form accurate understanding to closed-end fund.In this paper, the author studied the absolute return rate, risk-adjusted return, security selection ability, market timing ability and performance sustainability of the closed-end fund in different market stage with the method of comparativeness.The absolute return rate of closed-end fund shows close connection with security market, that is the absolute return rate of closed-end has a high correlation with the condition of security market. In every security market stage, the absolute return rate of different closed-end fund diverges significantly. As a whole, the closed-end fund has a higher absolute return rate and a lower risk than the market benchmark. At the same time, closed-end fund does not show significant difference with open-end fund. In this paper, the risk-adjusted return is expressed by Sharpe index, Treynor index, Jensen Index and downside-risk excessive-return ratio. The risk-adjusted return of different closed-end funds differs greatly. As a whole, the risk-return of closed-end fund and open-end fund shows no significant difference, and both of them are higher than the market benchmark. From the study of absolute return and risk-adjusted return, following conclusions can be drawn: closed-end fund shows the characteristics of expert in finance, the operating form of selection does not influence the performance of security investment funds, while the portfolio capability of fund mangers does.Closed-end fund shows some degree of security selection capability, but it is not significant. The security selection capability of closed-end fund shows the characteristics of the upswing with stock market stage. It performs better on the rising stage of stock market, and does worse on the decline stage. The security selection capability of closed-end fund diverges, but shows no difference with the open-end fund. The market timing ability of closed-end fund varies in different stock market stage, and the closed-end fund shows a certain degree of market timing ability and does better than open-end fund as a whole.Both closed-end fund and open-end fund does not show performance sustainability on not only short run but also long run.The nature of closed-end fund is an investment organization, fund performance is the operating result of it. As a security investment organization, the operating behavior of closed-end fund must be influenced by external environment and internal governance.The development of security market, government action, acts of other investors and the development of the fund rating agencies are important external factors influencing the performance of the closed-end funds. In the early stage, the listed companies are low quality and small scale, the portion of tradable shares is low, and the mechanism of stock market is imperfect. These factors have a negative impact on the performance of the closed-end fund. With the completion of the "splits share structure reform", these problems are solved partly. In China, security market is promoted by government, and the supports from government once played an important role in the process of the development of security market and closed-end fund. However, the governmental improper arrangement of function of security market and "offside" and "absence" coexisted in the process of supervision had a negative impact on the performance of the closed-end fund. In the early stage, Chinese security market was dominated by individual investors, and they were lack of necessary knowledge and skills of investment and their investment idea was unstable, so they were prone of "chase sell into". With the vigorous development of institutional investors by the regulatory authorities, the institutional investors have a stronger market force than individual investors now. The fund rating agencies have an advantage in the aspects on rating personnel, information gathering and disseminating channel, so they can evaluate funds more accurately and scientific, and their independent statue make the rating reports more credible. The rating agencies play an important role in the reputation mechanism of closed-end funds. In recent years, the fund rating agencies develop rapidly, however, some problems still unsolved, such as, the scale is small and the market strength is weak.China's closed-end fund is organized on the principal of trust, and the relationship between the fund holder and managers is principal and agent. As there exist information asymmetry between the principal and the agent, as well as their utility function not totally consistent, and the agents may make use of their information superiority to damage the interests of principals in the process of realizing their own maximum utility, and so mechanism designing is needed to protect the interests of the fund holders. According to the time of information asymmetry taking place, the principal-agent problems can be divided into adverse selection and moral hazard. Adverse selection is information asymmetry taken place before contract signing, and it can be solved by the signaling mechanism, screening mechanism, reputation mechanism, and guarantee mechanism. These mechanisms aim to supply additional information and reduce the information asymmetry, so improve the efficiency of the contract. Moral hazard is information asymmetry taken place after the contract signed, and it can be solved by the perfection of the internal governance structure, so the monitoring mechanism, deterrence mechanism and incentive mechanism are designed to relieve moral hazard. On the aspect of monitoring mechanism, corporate closed-end fund or the committee of trustee can be established. On the aspect of deterrence mechanism, the fund holders should have the power of changing the fund operating form and collective suing. On the aspect of incentive mechanism, management fee should be determined by the performance of the closed-end funds.