Holding-Based Evaluation upon Actively Managed Stock Mutual Funds in China

TL;DR

This study evaluates Chinese actively managed stock funds from 2005 to 2017, developing new performance measures based on holdings and comparing them with traditional models, revealing strengths in stock selection but challenges in asset allocation.

Contribution

It introduces holding-based performance measures for asset allocation and selection, and compares them with traditional price-based models in the context of Chinese mutual funds.

Findings

Stock selection ability correlates with Fama-French model estimates.

Industry allocation correlates with Treynor-Mazuy timing ability.

Most funds excel in stock selection but struggle with asset allocation.

Abstract

We analyze actively managed mutual funds in China from 2005 to 2017. We develop performance measures for asset allocation and selection. We find that stock selection ability from holding-based model is positively correlated with selection ability estimated from Fama-French three-factor model, which is price-based regression model. We also find that industry allocation from holding-based model is positively correlated with timing ability estimated from price-based Treynor-Mazuy model most of the time. We conclude that most actively managed funds have positive stock selection ability but not asset allocation ability, which is due to the difficulty in predicting policy changes.