Investigating the smart money effect in China mutual fund market.
Ngoh, Kia Wee.
Lim, Mervyn Ding Yan.
Teo, Yong Kian.
Date of Issue2013
College of Business (Nanyang Business School)
Using a sample of 172 Chinese open-end equity funds over a study period from 2005 to 2009, we seek to investigate the existence of the “Smart Money Effect”, i.e. whether investors are able to select better performing funds. Firstly, using both portfolio analysis and Fama-Macbeth Regression analysis, we found that the Chinese investors do not display the “Smart Money Effect”. Instead, funds with higher inflow experience poor performance subsequently, even after adjusting for risk using the Capital Asset Pricing Model (CAPM) and the Fama-French Three-Factor Model. Our results remain consistent in different time periods and differing market conditions. Overall, we find that Chinese investors tend to chase past performance when investing in mutual funds. Performance chasing and inflows are associated with poor contemporaneous performance, and continue to predict inferior fund performance in the subsequent quarters.
Final Year Project (FYP)
Nanyang Technological University