Smart money or dumb money? A study on the selection ability of mutual fund investors in China

Xunan Feng, Mingshan Zhou and Kam C. Chan

The North American Journal of Economics and Finance, 2014, vol. 30, issue C, 154-170

Abstract: We examine investors’ mutual fund selection ability in China. Using actively managed equity mutual funds between 2005 and 2011, we find that Chinese investors generally have no mutual fund selection ability, a result contrary to the smart money effect in the United States. We show that mutual funds that receive more new money subsequently underperform significantly. The findings are robust to several risk-adjusted performance measures. The unique data of China provide separate accounts of institutional and individual investors’ new money flowing into and out of mutual funds, allowing us to examine the mutual fund selection ability of institutional and individual investors. We document that institutional investors exhibit a smart money effect, that is, they are able to move new money into (out of) future good (poor) performers. In contrast, individual investors exhibit a dumb money effect. Our results provide useful information for regulators to review their rules, especially for the protection of individual investors regarding mutual fund investing in China. In addition, we show that it is useful to distinguish institutional and individual investors in mutual fund research.

Keywords: Investor; Mutual fund; Selection ability; China (search for similar items in EconPapers)
JEL-codes: G15 G23 G30 L25 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecofin:v:30:y:2014:i:c:p:154-170

DOI: 10.1016/j.najef.2014.09.004

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