Mutual fund performance in China : empirical evidence on regulation and sustainable investing : a thesis presented in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Finance at Massey University, School of Accountancy, Economics and Finance, Manawatu Campus, New Zealand

Abstract

This thesis examines mutual fund performance in the Chinese market, with a focus on regulatory influences and ESG practices. Chapter one introduces the motivation and overview of this thesis. Motivated by CSRC issuing the “Notice on Regulating the Development of Target Pension Securities Investment Funds (Trial)” in 2018, Chapter Two examines the impact of regulatory requirements—including fund family size, lock-in periods, and manager experience—on the performance of pension funds, specifically target date funds (TDFs) and target risk funds (TRFs). The results indicate that such regulations generally improve the performance of TDFs and TRFs, while providing little to no benefit for standard mutual funds. Mechanism tests reveal that TDFs & TRFs achieve greater flow stability, contributing to their outperformance. However, managing these regulated funds may inadvertently reduce the performance of other non-TDF and non-TRF funds within the same family, likely due to higher compliance costs and strategic considerations. These findings highlight the dual benefits and costs of regulation and underscore important policy implications for regulators, fund issuers, and investors, particularly in retirement savings contexts. This thesis not only examines the regulatory requirements for pension funds but also extends the analysis to ESG investment regulation. In 2018, CSRC revised the “Code of Corporate Governance for Listed Companies”, mandating ESG disclosure for listed companies. The improvement in ESG reporting provides mutual funds with greater access to relevant information, thereby facilitating the integration of ESG factors into investment strategies. Chapter Three explores the relationship between ESG investing and fund behavior using over 40,000 quarterly observations from more than 3,000 Chinese mutual funds. This chapter documents a significant negative association between ESG investing and style drift, which is stronger during periods of heightened economic policy uncertainty, elevated investor sentiment, and non-COVID-19 conditions. ESG commitments are also linked to key fund metrics such as tracking error, risk-adjusted return, and fund flow. The results support the argument that fostering long-term alignment between fund managers and investors through ESG commitments not only promotes sustainability but also helps reduce excessive risk-taking. Chapter Four builds on the findings of Chapter Three explores the role of ESG profile diversity (ESGPD)—which measures the diversity of stock-level ESG profiles within a fund’s holdings—in explaining window dressing. This is the first study that develops this measurement and investigates its relationship with window dressing. The main results show that a one-unit increase in ESGPD is associated with 10.64 units increase in window dressing, with the effect varying across fund, manager, and market conditions. Robustness checks confirm these results using alternative measures of window dressing and ESGPD, and by employing fixed effects. This chapter provides practical implications for fund managers and investors, enhancing transparency and understanding of factors driving window dressing. Overall, this thesis demonstrates that regulatory requirements and ESG practices play crucial roles in shaping fund performance in China’s mutual fund market.