Abstract
We provide a solid framework in analyzing of what drives mutual fund performance in Chinese mutual fund industry, and show that fund performance is determined not only by efforts of fund manager, but also by fund investor behavior. Our empirical evidence shows that the total purchase and redemption of fund investor contribute to the nondiscretionary trades of fund manager, in which they positively affect fund turnover and negatively affect fund performance. It yields the similar results when testing the effect of purchase and redemption of fund investors separately. Controlling for the impact of erratic fund investor behavior, the negative turnover-performance relation turns into positive. This indicates that the discretionary trades by fund manager would have positive impact on fund performance and confirms the point of view that fund manager owes great skills for fund investment. The debate over the sign of turnover-performance relation is actually concluded with manager or investor, which dominates.
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