Emerging market mutual fund performance: evidence for China

DOIhttps://doi.org/10.1108/JABS-10-2015-0176
Published date02 May 2017
Pages167-187
Date02 May 2017
AuthorZia-ur-Rehman Rao,Muhammad Zubair Tauni,Amjad Iqbal,Muhammad Umar
Subject MatterStrategy,International business
Emerging market mutual fund
performance: evidence for China
Zia-ur-Rehman Rao, Muhammad Zubair Tauni, Amjad Iqbal and Muhammad Umar
Zia-ur-Rehman Rao,
Muhammad Zubair Tauni
and Amjad Iqbal are all
based at the School of
Accounting, Dongbei
University of Finance and
Economics, Dalian,
China. Muhammad Umar is
based at Department of
Business Administration, Air
University, Islamabad,
Pakistan.
Abstract
Purpose The purpose of this paper is to find whether Chinese equity funds outperform the market and
do Chinese fund managers possess positive market timing ability. This study also aims to investigate
whether well-performing (worst) funds of last year continue to perform well (worst) in the following year.
Design/methodology/approach Capital Asset Pricing Model and Carhart four-factor model are used
for performance analysis, whereas for analyzing market timing ability, the Treynor and Mazuy (1966)
and Henriksson and Merton (1981) models are applied. To investigate persistence in the performance
of Chinese equity funds, all equity funds are divided, on the basis of performance in the past 12 months,
into three equally weighted groups (high, middle and low) and then observed for next 12 months. After
that, groups are again rebalanced according to their performance. This study uses a panel regression
model for analysis.
Findings Chinese equity funds are successful in providing higher than market returns, and fund
managers possess positive market timing ability. The authors find that Chinese equity funds do not show
persistence in performance as witnessed in developed markets. Well-performing funds (worst funds) of
last year do not continue to provide higher (lower) return in the following year. Moreover, the authors
detect positive relationship of fund size, age and expense ratio with the fund’s performance. Overall
results suggest that emerging market equity funds show better performance than that of developed
markets.
Practical implications Investors are better off if they invest in equity funds instead of index funds, as
results illustrate that equity funds outperformed the market. Further, the strategy of buying
well-performing funds of last year and selling poorly performing funds of last year does not look very
attractive in China. This study helps investors to understand the Chinese managed funds industry, and
such an understanding is also helpful for fund managers and asset management companies who use
performance information in marketing strategies.
Originality/value This is the first study to investigate the performance persistence in Chinese equity
funds and also contributes to the literature about the performance and market timing ability of equity
funds. The study takes the sample of 520 equity funds for the period from 2004 to 2014, which includes
a period of financial crisis of 2008.
Keywords Emerging markets, Performance, Capital markets, Financial markets, Comparative analysis,
Regression analysis
Paper type Research paper
1. Introduction
Emerging market mutual funds have shown a dramatic growth in the past two decades
(Huij and Post, 2011). Despite this enormous growth, there is a dearth of literature
regarding the analysis of performance and especially persistence in the performance of
emerging market mutual funds, presumably due to limited availability of data. Most of the
literature is about the mutual funds of developed markets like the USA and Europe. The
question is, whether the findings observed in developed markets carry over to emerging
markets. For example, do emerging market mutual funds beat the market? Do emerging
market mutual funds possess market timing ability? Is there persistence in the performance
Received 8 October 2015
Revised 17 March 2016
Accepted 11 May 2016
The authors thank Professor
Chi Guo Hua at the Dongbei
University of Finance and
Economics, China, and
anonymous referees for their
insightful comments and
valuable suggestions. All the
errors are their own. This
paper is a part of the doctoral
dissertation of the first author.
DOI 10.1108/JABS-10-2015-0176 VOL. 11 NO. 2 2017, pp. 167-187, © Emerald Publishing Limited, ISSN 1558-7894 JOURNAL OF ASIA BUSINESS STUDIES PAGE 167
of emerging market mutual funds? Do size, expense ratio and age of emerging market
mutual funds have any relationship with fund risk-adjusted performance?
Emerging markets are perceived to be less efficient than developed markets and they give
opportunity to fund managers to earn abnormal returns (Huij and Post, 2011). On the other
hand, there is a positive relationship between risk-adjusted return and variables like
development of capital market and strength of legal institutions (Ferreira et al., 2013;
Khorana et al., 2005). Following these arguments, one might expect emerging market
mutual funds to underperform. In the mutual fund industry, the information about
performance of funds is very important, as investors base their investment decisions on the
past performance of funds (Ippolito, 1992;Sirri and Tufano, 1998;Goetzmann and Peles,
1997;Gupta and Jithendranathan, 2012).
A lot of research has been done on the persistence in the performance of US funds. Many
authors document persistence in the performance of US funds (Carhart, 1997;Hendricks
et al., 1993;Brown and Goetzmann, 1995). Chieh-Tse Hou (2012) documents performance
persistence in the Taiwanese mutual fund industry. Białkowski and Otten (2011) find the
evidence of persistence in the performance of Polish equity mutual funds. There is a lack
of literature on the persistence in the performance of emerging market funds, especially of
Chinese funds. Though some research is available on Chinese funds, little work is done to
show the comprehensive investigation of performance, timing abilities, influence of funds
characteristics on performance and persistence. We consider China for our study because
of the following reasons: First, China is the biggest emerging economy of the world and its
mutual fund industry has huge growth potential. Second, the Chinese fund market offers an
opportunity to study a fast-growing market. During the 11-year period of our analysis, the
number of Chinese equity mutual funds (henceforth CEM funds) grew by 759 per cent.
Third, the studies on persistence in the performance of Chinese equity funds are scant.
Previous studies that investigate the performance of Chinese mutual funds are hampered
by either survivorship bias or short time-series (which limits the power of time-series-based
tests). This study takes the data of 520 CEM funds which are uncontaminated by
survivorship bias, for the period from January 2004 to December 2014. The fund
performance is analyzed by applying the Capital Asset Pricing Model (CAPM) and Carhart
four-factor model. This study also examines market timing ability, persistence in
performance and impact of fund characteristics on fund performance.
Our paper contributes to the current literature on emerging market mutual funds in several
ways. First, we provide a brief overview and particular insights of the Chinese mutual fund
market, which is an attractive market for international investors. The specific features of
Chinese mutual fund market can assist investors in understanding the financial
development dynamics in emerging markets. Second, the Chinese fund market enables us
to study the impact of fast-growing market on fund performance. Third, our findings of fund
performance differ from findings in the USA. Our findings suggest that CEM funds give
better return than the market. These results are in line with the view that emerging markets
are comparatively less efficient and give a chance to fund managers to get abnormal
returns. This study also finds that CEM funds possess positive market timing ability. Fourth,
to the best of the authors’ knowledge, this is the first elaborative study to analyze
persistence in the performance of CEM funds. By using the methodology of Białkowski and
Otten (2011), we do not find any evidence of persistence in CEM funds. These results about
persistence are in contrast to the findings in US, Taiwanese and Polish markets (Brown and
Goetzmann, 1995;Chieh-Tse Hou, 2012;Białkowski and Otten, 2011). One of the practical
implications of the non-existence of persistence in fund performance is that the strategy of
buying winner funds of last year and selling loser funds of last year does not look attractive
in China. Fifth, this study finds evidence of a positive relationship of fund’s size and fund’s
expense ratio with fund’s performance, but a negative relationship of fund’s age with its
performance.
PAGE 168 JOURNAL OF ASIA BUSINESS STUDIES VOL. 11 NO. 2 2017

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