Research on the Effects of Fund Performance on Fund Manager Turnover

doi:10.4236/jfrm.2012.13009

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Journal of Financial Risk Management

2012. Vol.1, No.3, 52-55

Published Online September 2012 in SciRes (http://www.SciRP.org/journal/jfrm) http://dx.doi.org/10.4236/jfrm.2012.13009

Research on the Effects of Fund Performance on Fund Manager

Turnover*

Tiaoyan Hui, Ze Yuan

Department of Industrial Engineering, School of Economics and Management, Xidian University, Xi’ an, China

Email: [email protected], [email protected]

Received July 8th, 2012; revised August 10th, 2012; accepted August 19th, 2012

We take the equity funds and hybrid funds in china as a sample, base on fund performance in the second

half of the year 2009, and make an empirical analysis on the effects of fund performance, interaction be-

tween fund performance and the character of fund manager on his turnover in 2010 year by method of

Logistic Regression Analysis using SPSS17.0. We find that fund return rate and excess return rate have a

significant negative impact on fund manager turnover, while risk-adjusted fund performance and the ca-

pability of market-timing and stock-selection have no significant effect on fund manager turnover. For

some characters of fund manager, such as fund manager age and securities working time will mitigate the

negative relationship between the fund performance and the fund manager turnover.

Keywords: Fund manager; Performance; Turnover; Interaction

Introduction

Fund manager, who is responsible for the investment deci-

sion, plays a pivotal role in the fund performance. Today, under

the fierce ranking competition, fund managers changed fre-

quently in our country. There are respectively 66, 132, 147, 180,

226 fund managers turnover from 2006 to 2010 year. It’s obvi-

ous that the funds in China ushers are in the trend of large-scale

personnel adjustment after years of rapid development and the

fund manager’s average tenure is merely 1.5 years. The fund

manager turnover rate continues to be high, then, what is the

reason leading to fund manager frequent turnover? Whether the

fund manager turnover is effective or not? We do this research

on the effects of fund performance, interaction between fund

performance and characteristics of fund manager on fund man-

ager turnover.

Literature Review

The academic literature has devoted considerable attention to

the effectiveness of fund performance on subsequent fund man-

ager turnover. Morck, Shleifer and Vishny (1989) find that a

manager is prone to be replaced when his performance is below

the average level. However, if the performance of overall Indus-

try is bad, the possibility of replacement is to be relatively low.

We can see that a company will assess a manager based on the

relative performance, and then decide his position and replace-

ment. Khorana (1996) documents an inverse relation between the

probability of managerial replacement and fund performance.

The possibility to be replaced of the fund managers whose rank is

lagged is 4 times that of the front. Hu, Hall and Harvey’s (2000)

analysis of 307 manager changes separates promotions from

demotions, they find that there is a negative relationship between

performance and the likelihood of being replaced or demoted,

while the probability of a manager being promoted is positively

correlated with his current and past performance. Wermers, Wu

& Zechner (2005) research on the American closed-end fund

manager replacement issues from 1985 to 2002 and demonstrate

that fund performance can also make significant explanations for

closed-end fund manager replacement, a fund underperforms its

peer group prior to manager replacement, but improves after-

wards. They also find that the discount income lagged two years

and the possibility of fund managers replacement are negatively

correlated, however, the discount income lagged one year does

not have the explanatory power, which shows that discount

change not only reflects the information of fund manager capa-

bility, but also the anticipation of the fund manager replacement

(Wermers, Wu, & Zechner, 2005).

In China, Jialiu Lu and Maobin Wang who take the replace-

ment issues of closed-end fund from 1998 to 2004 as a sample

find that the fund companies have a good internal governance

mechanism on the replacing of fund manager with bad per-

formance. The relative performance of fund managers and their

investment capability can significantly explain their demotion but

cannot interpret their promotion. At the same time, the change in

fund discount rate cannot explain fund manager replacement.

Fund performance cannot be well improved by replacing fund

manager (Lu & Wang, 2007). Bao (2008) concludes that the fund

performance is the crucial factor of the replacement of fund

manager. Replacing fund manager becomes a relatively effective

measure for improving performance when the fund performance

is poor ( Bao, 2008). Lintao Zhang’s research (2011) also indi-

cates that the fund performance can well explain the demotion of

fund manager but not promotion (Zhang & Deng, 2011).

Empirical Analysis

Data Resource

*Supported by the National Science Fund of China (NO: 70802047) and

Ministry of Education Humanities and Social Sciences Research (NO:

09XJA790008)

The sample consists of all equity and hybrid funds of china

in 2009. Based on the fund performance in the second half of

T. Y. HUI, Z. YUAN

the year 2009, it makes an empirical analysis on the effects of

fund performance, interaction between fund performance and

characteristics of fund manager on fund manager turnover in

2010 year. The data sample is composed of 222 funds, includ-

ing 75 fund manager turnover samples and 147 not turnover

samples. All the data originate from CSMAR database and

Genius database in China.

Previous papers have employed a variety of methodologies to

measure the fund performance. In order to fully reflect the fund

performance, this paper from several perspectives to measure it,

such as fund return rate, fund excess return rate (beyond the

index return rate over the same period), risk-adjusted fund per-

formance (Sharpe index, Treynor index, Jensen index), and the

capability of the market-timing and stock-selection of fund

managers.

Assumption

Fund performance is the direct indicator of the operating ca-

pability of fund manager, and the fund companies always make

career plan and adjustment for fund manager according to his

fund performance. Currently, closed-end fund promulgates net

assets value, net worth growth ratio and rank, etc. Usually, the

fund whose performance ranking in the top can often be noticed

by the investors and brings the continuous injection of new

capital; while the fund whose rank is lagged is incapable of

attracting investment or even leads to a large area of redemp-

tion. Therefore, under the pressure of short-term performance

ranking, the fund companies have to make adjustment of fund

manager according to fund performance, especially when the

fund performance declines. And they have to make adjustment

of fund manager so as to retrieve the trust of their investors.

1) Assumption 1: Fund performance makes negative effect on

fund manager turnover.

The character of fund manager will impact the relationship

between the fund performance and fund manager turnover. This

paper mainly considers three aspects including fund manager

age, securities working time and the working time on one fund.

In addition, we assume that the older the fund manager is and

the longer the securities working time is, the more plentiful the

practical experiences are and the more calmly the fund manager

copes with the market, and his adjustment is less sensitive to

his performance, even though his short-term performance is

poor, the fund company is relatively unlikely to adjust him.

Galaxy Securities researcher Yongan Ma declaims that juvenil-

ity is not a good thing for investment since this is after all a

kind of activity that one can upgrade through long-term exer-

cise. Thus, the interaction between fund manager age, securities

working time and fund performance will mitigate the inflection

of fund performance to manager turnover, likewise, when the

working time on one fund is longer, the fund manager has built

long-term cooperating relationship with the fund company, and

the fund company is more likely to indulge the fund manager

whose securities working time is longer especially facing the

current condition of serious lack of fund manager talents, thus

the interaction between the working time on one fund and fund

performance decreases the inflection of fund performance to

manager turnover.

2) Assumption 2: Fund manager age, securities working time

and the working on one fund will mitigate the negative correla-

tion between fund performance and fund manager turnover.

Data Statistics and Analysis

In this study, we estimate the probability of management turn-

over using a logistic regression framework using SPSS17.0.

The regression equation is:

ln αβ β

p

 



P is the probability of fund manager turnover, x is fund per-

formance indicator, Zi represents the character of fund manager

which consists of fund manager age, securities working time

and the working time on one fund.

In order to avoid the impact of crucial independent variable

(performance) and high correlation between interactive vari-

ables on the result of regression analysis, this paper makes cen-

tralization process for interactive variables, and then we have





ZXXZZ





1) The analysis of the effect of fund returns on fund manager

turnover

Firstly, based on fund returns and fund excess returns, this

paper makes an empirical research on the effects of fund per-

formance on fund manager turnover by SPSS17.0 software. The

results are shown in Tables 1 and 2.

Table 1.

Fund manager turnover Logistic Regression Analysis based on fund

returns rate.

Variable Regression

Coefficient Regression C oefficient

Standard Error Wald Sig.

Constant 0.273 0.605 0.2040.652

Returns rate –4.768 2.783 2.9340.087

Returns rate * Age3.002 1.241 5.852.016

Returns rate *

Securities working

time –0.187 0.829 0.0510.822

Returns rate * The

working time on

one fund –0.071 0.202 0.1230.726

Model degree of

fitting Chi-square = 11.259 Sig = 0.024

Table 2.

Fund manager turnover Logistic Regression Analysis based on fund

excess returns rate.

Variable Regression

Coefficient Regression Coefficient

Standard Error WaldSig.

Constant –0.945 0.194 23.818 0.000

Excess returns rate–4.759 2.783 2.924 0.087

Excess returns rate *

Age 3.005 1.242 5.852 0.016

Excess returns rate *

Securities working

time –0.177 0.829 0.046 0.831

Excess returns rate *

The working time on

one fund –0.067 0.202 0.111 0.739

Model degree of

fitting Chi-square = 11.251 Sig = 0.044

T. Y. HUI, Z. YUAN

The Tables 1 and 2 show both fund returns rate and fund

excess returns rate have negative impact on fund manager turn-

over, which demonstrates assumption 1. And this means there

is a determinate and reasonable fund manager adjusting mecha-

nism in our country, which can make adjustment of the fund

manager who has poor performance according to fund perfor-

mance to protect the benefit of investors. In terms of the inter-

action, only the coefficient of the interaction between fund

manager age and fund performance is lower than 0.05, which

means the impact is significantly positive. This shows that

when the older the fund manager is, due to the more plentiful

social experiences and the greater social influence, the prob-

ability of the incapable fund manager to be replaced decreases,

which partly verifies assumption 2. And the interaction between

fund returns rate, fund excess returns rate, and fund manager

securities working time, the working time on one fund has in-

significantly negative impact on fund manager turnover. It is

against with preceding assumption, the reason is likely that lack

of fund manager talents currently, which makes it easier for the

fund manager whose securities working time and fund working

time are longer to make job-hopping. Then when the fund

which is charged of this kind of fund manager performs poorly,

they will resign on their own in case of the demotion or the

negative influence of public opinion, which results in the nega-

tive interactive impact effect. This means the longer securities

working time or the working time on one fund is, the more

likely fund manager turnover is when the fund performance is

poor.

2) The analysis of the effect of fund risk-adjusted returns on

fund manager turnover

Then, based on fund risk-adjusted returns, this paper makes

an empirical research on the effects of fund performance on

fund manager turnover. Through Logistic Regression Analysis

on the impact of fund risk-adjusted returns and its interaction

with the character of fund manager on fund manager turnover,

it shows Chi-square = 5.727, Sig = 0.221 in Sharpe index

analysis model; Chi-square = 7.481, Sig = 0.113 in Jensen in-

dex analysis model; Chi-square = 7.481, Sig = 0.113 in Treynor

index analysis model, which means that fund risk-adjusted

returns has no explanatory power on fund manager turnover.

Due to the current condition that fund ranking generally bases

on fund returns rate, additionally the comparison of fund re-

turns rate is intuitionist and simply operated, the fund compa-

nies are largely dependent on the adjustment of fund manager

according to fund returns performance.

3) The analysis of the effect of fund manager market-timing

and stock-selection capability on fund manager turnover

This paper adopts CL model to assess fund manager’s capa-

bility of market-timing and stock-selection, and Logistic Re-

gression Analysis on the impact of it on fund manager turnover

is shown in Tables 3 and 4

Tables 3 and 4 show that fund manager’s capability of stock-

selection and market-timing has insignificantly negative impact

on fund manager turnover. And the interaction between the ca-

pability of stock-selection and fund manager age has signifi-

cantly positive impact on fund manager turnover. While the

fund manager’s capability of market-timing and securities work-

ing time have significantly positive impact on fund manager

turnover under 0.1 level, which partly verifies assumption 2.

This means the longer the securities working time is, the greater

the social influence and recognition. Since individuals consider

that fund industry requires plentiful practical experiences, and

Table 3.

Fund manager turnover Logistic Regression Analysis based on the cap-

ability of stock-selection.

Variable Regression

coefficient Regression coefficient

standard error WaldSig.

Constant –0.155 0.741 0.044 0.834

The capability of

stock-selection –0.459 0.553 0.689 0.406

The capability of

stock-selection *

Age 0.845 0.305 7.678 0.006

The capability of

stock-selection *

Securities work-

ing time

–0.086 0.145 0.351 0.554

The capability of

stock-selection *

The working time

on one fund

–0.018 0.040 0.196 0.658

Model degree of

fitting Chi-square = 12.455 Sig = 0.014

Table 4.

Fund manager turnover Logistic Regression Analysis based on the

capability of market-timing.

Variable Regression

coefficient Regression coefficient

standard error WaldSig.

Constant –0.864 0.260 11.028 0.001

The capability of

market-timing –1.025 1.754 0.342 0.559

The capability of

market-timing *

Age 0.772 0.605 1.629 0.202

The capability of

market-timing *

Securities working

time

0.767 0.468 2.687 0.100

The capability of

market-timing *

The working time

on one fund

0.066 0.125 0.282 0.595

Model degree of

fitting Chi-square = 7.278 Sig = 0 .122

fund manager can acquire high investing capability only if

through long-term practice, fund manager’s securities working

time becomes a crucial standard for selecting fund manager.

Therefore, for the fund manager whose securities working time

is longer but fund performance is poorer, the fund companies

will consider help them reverse the performance if only possi-

ble instead of making them be replaced. Namely, securities

working time can mitigate the impact of fund performance on

turnover.

Conclusions and Suggestions

The empirical research shows that fund performance has

negative impact on fund manager turnover, however, this im-

pact is merely significant for the index of fund returns rate and

excess returns rate to fund manager turnover with a significance

level of 0.1. This means that under the pressure of fund returns

rate ranking, the fund companies generally make adjustment of

fund manager according to the performance on returns rate so

as to form a determinate incentive and restraint mechanism;

Risk-adjusted fund performance and the capability of stock-

selection and market-timing both have no explanatory power on

fund manager turnover, which illustrates that the fund compa-

T. Y. HUI, Z. YUAN

nies in our country pay immoderate attention to fund manager’s

earning capability but overlook their capability of coping with

risk and deep-seated trading. This kind of elimination mecha-

nism makes many fund managers adopt high risk and high re-

turns investing strategy, which significantly decreases the prac-

tical level of returns. Therefore, we should introduce foreign

advanced fund performance evaluation system into our country

in order to make scientific, reasonable and objective evaluation

for fund practical performance. In addition, on this basis, we

also need to make adjustment of fund manager to form a sur-

vival of the fittest incentive and restraint mechanism so as to

ignite the work passion of fund manager. Finally, for adjusting

variables, the interaction between fund manager age, securities

working time and fund performance has positive impact on

fund manager turnover, which means that when the operation is

poor, the turnover of older fund managers is lower than that of

younger ones and the turnover rate of the fund managers whose

securities working time are longer is lower than that of the ones

whose working time is shorter. The fund companies should try

their best to avoid the evaluation on the character of fund man-

ager, well embody fairness, and ensure the benefits of investors,

so as to inspire the fund managers’ working enthusiasm and ac-

hieve the coordination of the fund companies, fund manager

and investors.

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