Whether Deviation From Family Portfolio Helps Fund Outperform In The Fund Family

Recent statistics has revealed accelerated growth within domestic common fund market in China. The size of common funds has exceeded 8 trillion RMB by the end of year of 2015. Consequently, the number and size of the funds marketed by fund management companies are also increasing simultaneously, which largely promotes the appearance of fund family. Fund family (also called fund management company) will provide a series of public resources for the internal members of the fund at the family level. The maximum profit is achieved by adopting a "star fund building" and "share co-holding" strategy to attract capital from shareholders and improve the yield of stock return.However, these two strategies result in uneven resource allocation inside in between star funds and non-star funds. It occurs that the non-star funds have to subsidize the star funds at expense of sacrificing their own performance. Under such circumstances, funds within fund family in order to protect their own interests as well as to acquire more available resources will compete with each other to become star fund. Just like the fund managers who want to outperform the market must take the way of actively managing the fund to deviate from the market portfolio, fund managers who desire to outperform the family should also take the way of actively managing the fund to deviate from the family portfolio. Here comes to the questions:Whether the behavior of deviating from the family equity portfolio is a new dimension of measuring fund managers’ability of active management? Besides, whether this behavior will lead excellent performance to the funds and managers?With regard to the above two questions and following the previous work of foreign scholars, a new indicator is defined as deviation from family portfolio (DFP), which measures the deviation of a single fund’s equity portfolio in comparison with fund family’s whole equity portfolio using Euclidean distance. We calculated DFP for each fund and the final statistics shows that the DFP of acvitively managed funds is rising steadily during the recent ten years, and DFP will increase as the fund size narrows and the operating period grows. In addtion to size and age, other fund family characters also have great impact on DFP. Fund numbers in the family and average operating period in the family have positive correlation with DFP. However, the size of fund family is negatively correlated with DFP. Based on the indicators of DFP, a theoretical model based on 40 seasonal data from 2006 to 2015 is built and verified.DFP directly determines the active management behavior of a fund against fund family. But whether DFP is a indicator of measuring fund managers’ability of active management (the traditional ability of active management measures the ability of outperforming the market)? We selected two mature and direct indicators measuring the ability of active management-tracking error and R square to represent active management in our study. Then we used fixed effect panel model and random effect panel model to explore the relationship between active management and DFP. The empirical test shows that:DFP serves as an effective new indicator which reflects the fund manager’s ability of active management.To test the strategy of deviating from family portfolio, we need to focus on whether this strategy promote the fund performance. Using Carhart-α and Fama-French-α as the representing variable of the fund performance, we constructed a virtual investment portfolio and regressed our data using Fama-MacBeth method to probe the relationship between DFP and fund performance. The above empirical test were performed four times because we tested the cunrrent and lagged 1-3 period DFP. The empirical test shows that:lagged 1 period DFP can forecast current fund performance and this relationship would not be affected by other active mangement indicators. Take the above study as a whole, deviation from family portfolio could definitely promote the fund performance, and DFP is a new dimension of measuring fund managers’ability of active management.