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
Copyright © 2012 SciRes. 52
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: huity@163.com, yuanze_1989@163.com
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:
3
0
1
ln αβ β
1i
i
p
X
XZ
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

X
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
Copyright © 2012 SciRes. 53
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-
Copyright © 2012 SciRes.
54
T. Y. HUI, Z. YUAN
Copyright © 2012 SciRes. 55
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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