Study On The Relationship Between Style Drift And Manager's Ability Of Mutual Fund

Mutual fund as the largest institutional investor is becoming increasingly prominent role in Chinese capital market. As increasing in variety, quantity and the diversification of investment style of mutual fund, the group of mutual fund' investors enlarge rapidly. The mutual fund has become a popular way in public finance. Therefore, make scientific researches on style drift and manager's ability of mutual fund and the relationship between them are extremely important and. urgent. However, the research in this filed is few at home and abroad. Under this very background, the style drift and manager's ability is analyzed in this paper. This study also can provide a reference for decision-making of investment and policy-making.In this paper, we take one Return-based Style Analysis—Gruber model as a major method in style recognition of stock and mixed funds, base on quarter and different market quotation samples. Growth-Value of mutual is also analyzed by the Morningstar style box (Style-Box) of Portfolio-based Style Analysis in the same time. As well as, the E-G model is used in Definition on the investment style of bond fund. According to the ideology of Excess Sharpe Ratio-ESR, we structure a new indicator—Excess RAROC-ERAROC to measure manager's ability. A comparison between RAROC and ERAROC is also made and the corresponding condition which the reasonable indicator of manager's ability should satisfy is proposed. Finally, through the regression analysis of manager's ability and style drift by structuring the index of degree of style drift and the Spearman and Kendall correlation test, the relation of them is be discussed.The study bases on returns between 2004-1-1 and 2008-3-31 with time-series and panel data shows that: The convergence of style and the value of ERAROC obviously whether the whole or Individual fund in the same sample, which reflects the herding effect in investment behavior; The other, the style changes as market situation changes in different samples. Almost few funds can maintain the same style in the entire period, which is an obvious style drift; Comparing nominal style in prospectus and actual style, our results suggest the style of fund has similarity to great extent and show the phenomena of misclassification and majority of funds exist "style mismatch". The results also show that: the managers have better ability in the bear market than in the bull market and the worst in the concussion market. The manager's ability of Chinese open-end funds is weak from the whole aspect.Finally, the following conclusions according to the analysis are draw: style drift is not reflection of manager's ability, but the result of herding. Investors should base on the actual style rather than nominal style in their assets allocation for fund managers do not adhere to investment style which they stated in prospectus usually.