FIN3080: Investment Analysis and Portfolio

Management
7. Mutual Fund and Mutual Fund Performance

Jane Chen
November 22, 2023
The Chinese University of Hong Kong, Shenzhen

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History of Mutual Fund in the US
Inception

1868
–” ” In 1868, the British
government approved the establishment of the world’s earliest
contractual fund, which was the prototype of a significant investment
fund – ”Overseas and Colonial Government Trust Fund”
• Since the industrial revolution that began in the 1760s, British
social wealth and personal wealth have accumulated a lot, and
there are a lot of idle funds
• By publishing the prospectus in The Times, the warrants are
publicly sold to the public, with a total investment of 480,000
pounds and a trust period of 24 years.
• The funds raised are managed and operated by a full-time
manager authorized by the British government as the trust
manager
During the 60 years from 1870 to 1930, a large number of fund
management companies were established in the UK 2
Inception

On March 21, 1924, 200 professors from Harvard University

contributed $50,000 to establish the ”Massachusetts Investors Trust”
(MIT) in Boston.

• Four months later, on July 15, 1924, the ”Massachusetts Investors

Trust” began its public offering. Investors can purchase and
redeem fund shares at any time according to the net assets of
the fund.
• The first open-end fund in fund history
• Holdings are concentrated in 19 blue chip stocks, 14 railway
stocks, 10 utility stocks and 2 insurance company stocks, more
like a large-cap stock fund.

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Inception

The Great Crash and stock market crash of 1939 devastated the
fledgling U.S. fund industry

• During the Great Depression, MIT’s net worth once lost more
than 80%

In 1940, the U.S. Securities and Exchange Commission promulgated a

series of laws and regulations including the ”Investment Company
Act”,

• Strict regulations have been formulated on fund issuance,

information disclosure, pricing, internal governance structure,
and transaction behavior of managers to ensure the
standardized operation of fund companies and effectively
protect the rights and interests of fund investors, to maintain
the long-term healthy development of the fund industry in the
future. A solid foundation has been laid.
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Development

The development of the US fund industry is greatly affected by

economic fluctuations
• With the economic recovery in 1980, the fund increased from
US$130 million at the beginning of 1980 to US$6.96 billion, with a
20-year compound growth rate of 22.02%.
• In the two years following March 2000, the Nasdaq 5132.52
plummeted nearly 3,000 points, and mutual funds saw net
redemptions of $46 billion and $48 billion, respectively
• The 2008 financial crisis slashed the size of mutual funds by
another $2.5 trillion to $1.01 billion.
Several famous fund companies:
• T.Rowe Price
• Dimensional Fund Advisors
• Vanguard
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History of Mutual Fund in China
Inception

In November 1992, Shenzhen People’s Bank approved the

establishment of Shenzhen Investment Fund Management Company

• Tianji Fund: a closed-end fund with a scale of 581

million yuan

1997 1997 ”Interim Measures for the

Administration of Securities Investment Funds”

• Funds developed prior to the implementation of this Act are

referred to as ”Old Funds”

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Inception

1998 3 20
In March 1998, Southern Asset Management and
Cathay Pacific Asset Management initiated the establishment of two
closed-end funds with a scale of about 2 billion yuan.

• Fund Kaiyuan and Fund Jintai

• This kicked off the prelude to the pilot program of China’s
securities investment funds

Restructuring of old funds: Transform the assets

of ”old funds” into new funds that comply with the ”Interim Measures
for the Administration of Securities Investment Funds”

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Inception

The first open-end fund: Huaan Innovation

• By the end of 2003, open-end funds have surpassed closed-end

funds in quantity and become the main form of funds

2002 10
In October 2002, the first Sino-foreign joint venture fund
management company was established: Guolianan Fund
Management Company

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Development

2004 6 1 The ”Securities

Investment Fund Law” was officially implemented on June 1, 2004,
and the legal norms of the fund industry have been greatly improved

• The fund industry has developed rapidly

2013 6 1 The revised

Securities Investment Fund Law came into effect on June 1, 2013

• The regulation of private equity funds, the entry threshold of

fund companies, the scope of investment and business
operations have been revised and improved.

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Discussion

Looking at the development of China’s fund industry based on the

experience of the United States

• 1940 1970 From the

promulgation of the ”Investment Company Law” in 1940 to the
rapid development of the fund industry after 1970, the period
lasted for 30 years
• 2013 Ten years after the
”Securities Investment Fund Law” was promulgated in 2013,
China’s fund industry still has a lot of room for development
• Cinda Securities: our country’s fund industry is in the 80s
and 90s of the United States

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Discussion

The development of China’s fund industry has distinct characteristics

of the Internet

• Tianhong Fund has been firmly occupying the first

place in the past with the help of the huge share of Yu’ebao
money fund

Significance of developing fund industry

• Academic perspective: Introduce more mature investors to the

market and improve the pricing efficiency of the market
• Asset Allocation Perspective: Diversified Investment Choices

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Report of Mutual Funds in China
2022
Mutual Fund Performance

Mutual fund performance is probably the most important indicator

for a fund

• Peter Lynch: 1977 - 1993 annualized return of 28%

• Yawei Wang: 2005 - 2012 fund net value doubled by 10 times

How should we measure mutual fund performance?

• Raw return?

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Mutual Fund Performance

Broadly speaking, we can categorize the return of an actively

managed fund into two parts:

• risk-based premium
• managers’ skills

We can further decompose managers’ skills into two parts:

• security selection ability: the ability to find the undervalued

stocks
• market timing ability: the ability to predict the market trend

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Security Selection

• Fama-French Carhart Four-Factor Model

• Rit − Rft =
αi + βim × (Rmt − Rft ) + βismb × SMBt + βihml × HMLt + βimom × MOMt + ϵit
• Rit − Rft is the excess return for fund i in month t
• Rmt − Rft is the market excess return in month t
• SMBt is the small-minus-big factor
• HMLt is the high-minus-low factor
• MOMt is the momentum factor

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Security Selection

• Fama-French Carhart Four-Factor Model

• Rit − Rft =
αi + βim × (Rmt − Rft ) + βismb × SMBt + βihml × HMLt + βimom × MOMt + ϵit
• αi is excess return from stock choice
• αi ≈
(Rit −Rft )− βc [ d [
im ×(Rmt −Rft )− βismb ×SMBt − βihml ×HMLt − βimom ×MOMt
• αi statistically larger than 0 means statistically excess return
• αi statistically less than 0 means statistically reverse return
• αi near 0/ insignificant means little ability in security selection

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Market Timing

• Treynor-Mazuy Model
• Rit − Rft = αi + βim × (Rmt − Rft ) + γi × (Rmt − Rft )2 + βismb × SMBt +
βihml × HMLt + βimom × MOMt + ϵit
• γi means timing selection ability
• γi statistically larger than 0 means statistically timing return
• γi statistically less than 0 means statistically reverse return
• γi near 0/ insignificant means little ability in timing selection
• We use such Treynor-Mazuy Model to evaluate the security
selection ability and market timing ability

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China Evidence

• We use data from China stock market

• We use Stock-type public funds and partial stock-type public funds
as the actively managed funds

• We exclude Flexible Allocation Fund

• Monthly return from the past five years (2017-2021)

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China Evidence

• Regression Results: 342 αi positive significant

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China Evidence

• Regression Results: only 5 γi positive significant

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China Evidence

• Robust tests
• We use 3-year, 5-year, 7-year data, all have same results
• We use 454 funds with full data across three time length, same
results
• We use bootstrap in re-selecting samples and construct CI, and 291
out of 342 with statistically significant αi still show significance
under 95 level and thus αi are from ability, not luck.

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China Evidence

• Consistency in Performance
• Spearman Correlation Analysis
• Spearman Correlation:
• is computed on ranks instead of the raw values
• python command: scipy.stats.spearmanr

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China Evidence

• Consistency in Performance
• Spearman Correlation Analysis
• statistically larger than 0 means statistical consistency
• statistically less than 0 means statistically reverse consistency
• ρt statistically near 0 means statistically little consistency

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Performance Consistency

• Spearman Correlation Analysis

• Formation Period of 1 year to Holding Period of 1 year
• Formation Period of 3 year to Holding Period of 1 year
• Formation Period of half year to Holding Period of half year
• Long time period shows little consistency.
• Within 6 months, seems OK, but considering expenses, not
favorable to adjusting frequently.

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China Evidence

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China Evidence

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China Evidence

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References

• https://m.gelonghui.com/p/458717
• 2022

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