A Reliable Performance Measure to Differentiate China's Actively Managed Open-End Equity Mutual Funds

Abstract

We compare different fund performance measures to examine which performance measures can generate risk-adjusted returns between high ranked and low ranked China's actively managed open-end equity mutual funds. Our results show that only the 6-factor (Fama and French (2015) five factors plus a momentum factor) alpha as the performance measure meets the criteria. Separated by the 6-factor alpha, better performed funds tend to have larger asset under management and higher percentage of hybrid funds. Through our sample period from July 2004 to December 2015, the highest ranked quintile funds generate monthly 0.24% risk-adjusted return more than the lowest ranked quintile funds. Furthermore, our results from fund return, holding return, and trading data all demonstrate the better performance comes mostly from the bear markets, suggesting those better performed funds exhibit their market timing and stock picking abilities when investors need them most.

Keywords: fund performance measure, risk-adjusted return, China

JEL Classification: G11, G23