Institutional Investors’ Preference On Stock Selection Ability And Market Timing Ability

Institutional investors are becoming the main players of mutual fund in China due to their professional knowledge and operational experience.Stock selection and market timing,two of the most important investment abilities,have shown significant difference on operational logic and risk exposure.The relationship between institutional investors’ behavior and two investment abilities(i.e.stock selection and market timing)will be discussed in the paper.There were 200 stock-leaning funds from 2004 to 2017 used as study samples in this paper to testify institutional investors’ preference on stock selection ability and market timing ability with respect to stock-leaning funds.The study showed that there was a positive relationship between shareholding ratio and stock selection ability rather than market timing ability,indicating that institutional investors emphasize stock selection ability over market timing ability.Then,the mutual fund market was analyzed in different phases.The result suggested that both stock selection ability and market timing ability would be preferred only when the market was poor,even if it was the case,institutional investors still preferred stock selection ability a little bit more.As the market was getting better,they would gravitate towards stock selection ability even further.Stock selection ability played an important role on institutional investors’ behavior,and it would become more important as the market was getting better.Several theories including Revealed Preference Theory,Bounded Rationality Model,Mental Accounting Theory,etc.were applied in this paper in order to provide an in-depth analysis of mutual fund market.