Performance persistence in institutional investment management: The case of Chinese equity funds

Abstract

This paper investigates the performance and persistence in performance of equity funds in China. We apply the capital asset pricing model (CAPM) and the Carhart four-factor model to examine 520 equity funds for an eleven-year period with 39,449 observations. To investigate persistence, the entire sample is divided into ten portfolios (deciles) on the basis of lagged one-year performance and then observed over the next 12 months. We find that equity funds in China outperform their benchmark market but do not find any evidence of persistence in the performance of equity funds. Top-performing (worst-performing) funds do not continue to perform well (worse) in the following year. Top-performing funds are younger and have lower expense ratios than the worst-performing funds. However, the size of the top-performing funds and the worst-performing funds show no significant difference. Our results suggest that past performance of equity funds is not predictive of future fund performance.