Stock Selection Ability and Information Processing Ability of Mutual Funds in Korea

Kho, Bong Chan; Kim, Jin Woo

Korean Journal of Financial Studies 2013;42(3):493-527.
Published online June 30, 2013.

Bong Chan Kho, Jin Woo Kim

액티브펀드의 종목선택능력과 정보처리능력에 대한 검증

고봉찬, 김진우

Abstract

This paper confirms that the stock selection ability is the most important determinant for mutual fund performances in Korea, and tests whether the stock selection ability is related to the information processing ability of mutual fund managers. Using the monthly fund return and fund portfolio data of 588 Korean active funds provided by Zeroin from January 2001 to June 2011, we decompose the monthly fund returns into 3 components: returns from stock selection ability (CS), returns from market timing ability (CT), and returns from fund investment style (AS), which follows the method of Daniel, Grinblatt, Titman, and Wermers (DGTW, 1997). The results show that the monthly average of CS is significantly positive, 0.94%, which is significantly higher than those of CT and AS by 0.96% and 0.29%, respectively, indicating that the stock selection ability is the most important determinant for mutual fund performances in Korea. Next, we further decompose the stock selection ability (CS) into 3 components: returns from existing fund portfolio position (CSO), returns from stock trading during 1 month (CST), and return adjustment due to fund flows during 1 month (CSA). The results show that the monthly averages of CSO, CST and CSA are 0.89%, 0.07%, and -0.03%, respectively. So, we conclude that most of the CS comes from the existing fund portfolio position (CSO). Finally, in order to analyze the relation between the stock selection ability and the information processing ability of active fund managers, we estimate the probability of informed trading (PIN) of individual stocks for each month and then calculate the weighted-average PIN of each active fund (Fund-PIN). The results show that the monthly average CST is increasing as the Fund-PIN is increasing, whereas CSO that consists of large part of CS is not related to the Fund-PIN. This indicates that there is no significant relation between the stock selection ability and the information processing ability of active fund managers.

Key Words: 액티브펀드,정보처리능력,종목선택능력,펀드성과 분해분석,Active Fund,Fund Performance Decomposition,Information Processing Ability,PIN,PIN 측정치,Probability of Informed Trading,Stock Selection Ability