Does rapid market growth enhance efficiency? An evaluation of the Chinese mutual fund market

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In recent years, China’s mutual fund market has grown exponentially. With hundreds of new funds introduced into the market each year, an essential question to ask is whether this voluminous growth promotes funds’ efficiency, as funds compete for investment. To overcome the drawbacks of traditional portfolio performance metrics, this study utilizes a non-parametric model, data envelopment analysis (DEA), to assess the relative efficiency of equity and hybrid funds for 2016–2018. The empirical results show that despite the development in the fund industry, only a small portion of the funds are fully efficient. While efficiency improvement is observed in equity funds, the efficiency in hybrid funds actually deteriorates. On average, equity funds are more efficient and persistent in performance than hybrid funds. The empirical results also indicate that the primary areas of inefficiency are downside risk management and fund fee structures. For hybrid funds, fund size is also related to efficiency performance. The findings of this study offer implications for how to strengthen the development and stability of the Chinese mutual fund market.

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    • Figure 1. Number of open-end funds in the Chinese mutual fund industry
    • Figure 2. Total net assets (USD million)
    • Figure 3. Number of open-end funds by type in the Chinese mutual fund industry
    • Figure 4. The proportion of assets under management by type in the Chinese mutual fund industry
    • Table 1. Descriptive statistics of Chinese equity and hybrid funds for 2016–2018
    • Table 2. Summary of the efficiency scores of equity and hybrid funds
    • Table 3. Summary of funds’ persistent efficiency
    • Table 4. Mean slacks in the inputs for Chinese equity and hybrid funds
    • Table 5. Results from the censored Tobit regression