Abstract
This study examines the market-timing performance of Chinese equity securities investment funds during the period from May 2003 to May 2014 using the parametric tests of Treynor–Mazuy and Henriksson–Merton as well as the Jiang non-parametric test. Based on the non-parametric approach, the study finds that only one fund among the sample of 419 funds possessed statistically significant market-timing skill, while 9% of the funds were statistically significant negative market timers. Most funds do not time the market. This conclusion is robust when controlling for publicly available information in evaluating ‘private’ timing ability. Consistent with studies of other markets such as the UK, a higher prevalence of successful market timers is found by the Treynor–Mazuy and Henriksson–Merton methods compared to the non-parametric procedure.
Highlights
Assessment of fund performance is based on two abilities: securities selection ability and market-timing ability
The former examines whether a fund manager beats the benchmark portfolios in risk-adjusted terms (Jensen 1968; Fama and French 1993; Gruber 1996; Ferson and Schadt 1996; Carhart 1997), while the latter tests if a fund manager correctly anticipates the direction of aggregate market fluctuations by entering a bull market (Treynor and Mazuy 1966; Henriksson and Merton 1981; Admati et al 1986; Bollen and Busse 2001; Jiang 2003)
The Asset Management Association of China classifies all Chinese securities investment funds into five categories and defines these as follows: (i) equity funds; (ii) bond funds; (iii) money market funds, solely invested in the Chinese money market; (iv) commingled funds, which are invested in stocks, bonds and money markets; and (v) QDII (Qualified Domestic Institutional Investors) funds, which are invested in global assets
Summary
Assessment of fund performance is based on two abilities: securities selection ability and market-timing ability. Market timing may be practised by: (i) tactical asset allocation that requires fund managers to successfully allocate money among different asset classes, e.g., equities versus cash, according to the anticipated future direction of the market; and (ii) adjusting the portfolio’s sensitivity to the market in response to the expected market return, i.e., increasing (decreasing) the portfolio beta in response to an anticipated bull (bear) market (Jiang 2003) The former technique examines whether the portfolio holdings anticipate market moves, which requires information on a portfolio’s composition over time. The Jiang (2003) non-parametric market-timing test, as well as tests of private timing ability conditional on publicly available information, have never been previously undertaken for the Chinese open-end securities investment fund industry.
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