Evaluation of Mutual Fund Performance and Advisory Fees in China

When people invest in mutual funds, they invest in talents of portfolio management. They obtain return from mutual funds active strategies and pay for the service of their investment advisor at the same time. This paper aims to evaluate the mutual fund performance and advisory fees in China to shed light on the answer to the question of whether it is rational to invest in mutual funds in China. This paper investigates the performance and advisory fees of 55 Chinese equity mutual funds during the period 2005-2007. The findings of the empirical test seem not in favor of mutual fund industry in China. First, the result of Jensen's alpha denies the ability of mutual fund managers to beat the passive investment strategy. This may also be interpreted as the capital market in China is efficient. Second, based on the analysis of economies of scale, managers may overcharge advisory fees. In other words, shareholders pay a premium for conflicts of interest in China. Third, in the regression of returns and advisory fees, there is no relation between them. Performance and expense of managed skills in mutual funds are unrelated