Research On Market Characteristics And Open-end Fund Investment Style Drift

With the economic growth in recent years,the number of fund management companies and the total size of the fund have multiplied every year.However,since the disclosure of fund investment is quarterly,in the absence of market supervision,the investment style of the fund is prone to drift.In previous studies,stock indexes are often used to distinguish different intervals of the market,and market bubbles are not taken into consideration.In addition,the conclusions of fund investment style drift’s impacts are also different in these researches.So this paper explores under which market conditions,the fund investment style drift is likely to occur,and whether its drift in this market will bring improvement in performance.In this paper,we used the principal-agent theory explain why the fund investment style drift will happen,and used the flock effect and momentum effect explain why the fund manager’s investment style convergence will happen.Then we explained why the fund investment style drift degree is different in different stages of market by prospect theory,and made inference and hypothesis.Under the high PE stage,fund managers often have profit already.Affected by certain effect,they are risk-off,and willing to stick to the style.While under low PE stage,influenced by the reflection effect,they are risk-on and tend to transform style.In addition,this paper holds a positive attitude towards the impact of style drift on fund performance.Since the style drift in Chinese stock market is normal,and the size-based style rotation strategy has been proved to improve the performance significantly,the appropriate investment style drift may not bring higher risk,but improve the performance.We used P/E ratio as the proxy variable of market characteristics to describe the market’s return and risk level,and divided 2009-2018 into three intervals based on its ten-year average.We selected 63 open-end stock funds as sample funds,and Sharpe multi-factor model was used to conduct fractional regression to identify their investment styles.The R square obtained by regression was used to measure the degree of style drift.Next,we compared the coefficient of regression and R square between three intervals to explore the drift differences in different markets.Then R squared was used to group the funds in the subintervals and compare the performance levels of the funds between the groups.The study found that in the stage of higher P/E ratio,the fund investment style is concentrated on the large-cap growth,and the fund managers have strong style convergence.At the same time,the drift of the funds is generally lower.Those funds with higher degree of drift bring lower risk,but the difference in earnings is not significant.While the P/E ratio is lower,the fund investment style is concentrated on small-cap growth,and the style convergence is also serious.Meanwhile,the drift of funds is generally higher,and the funds with higher degree of drift are benefited during this period,and the risk-adjusted performance is also better.