Institutional investors in China outperform the market on an ongoing basis!
With the adjustment of market risk factors, the total return of stock funds is 6.5% higher than market average. After deducting expenses, it is still 4.75% higher, which is widely different from the US market.
How do they make it?
A study of Chi Yeguang, Assistant Professor of Finance at Shanghai Advanced Institute of Finance (SAIF) of Shanghai Jiao Tong University shows that it is related to the composition of investors as well as the information advantages of institutional investors in China.
His thesis named Private Information in the Chinese Stock Market: Evidence from Mutual Funds and Corporate Insiders about the effectiveness of the secondary stock market in China, based on an analysis of positions and returns of 400 actively managed and stock funds from 2003 to 2015 as well as an in-depth research on the stock holdings of major shareholders of listed companies, won the first prize of CFA Best Paper in the 29th Australasian Finance and Banking Conference CFA Institute Research Award in late 2016.
According to Prof. Chi, the effectiveness of a secondary market depends on the distribution of information and pricing. First, an effective market should distribute relevant information to all market participants. And second, market participants should be able to analyze the information accurately and influence asset pricing through trading.
However, Prof. Chi found that Chinese retail investors fall behind institutions in both areas. First, in terms of information gathering, institutions could gain first-hand information due to their huge database while for retail investors the information flow is much slower. Second, in regard of information analysis, institutions can hire financial experts to analyze the information and trade stocks while retail investors are behindhand. Thus, it is natural for institutions to defeat retail investors and beat the market as the market is dominated by retail investors in China. Still, the profile of China’s stock market is improving on a vertical basis. On one hand, the performance of stock funds is falling with a total decrease of 1.3% over the past decade. On the other hand, the predictability of share prices through what significant shareholders are buying is decreasing in recent years.