Mutual fund managers: Promotion or demotion - New evidence from equity fund managers in China’s financial market

By manually collecting the data of China’s equity mutual fund managers’ turnover from 2005 to 2019, and tracking where the resigning fund managers go, this paper divides resigning fund managers into two categories: “Promotion” and “Demotion” and researches the impact of investment performance on the career of fund managers. The results show that: 1) Fund managers with excellent performance and poor performance both have a high turnover rate. The fund managers with worse investment return will have the higher probability to be demoted, while the fund managers with better investment return will have the higher probability to be promoted. The “Demotion” mechanism is related with the relative and short-term performance. The “Promotion” mechanism is related with the absolute performance and long-term performance. 2) There is a significant negative correlation between fund managers’ probability to be promoted and their performance during the bull market. Further research shows that lots of mutual fund managers with mediocre performance resign and go to private fund companies during the bull market,. which is the reason for the anomaly. 3) The mismatch of “scale-skill” of fund managers has an impact on their demission. The bigger the management scale is, the higher the probability to be demoted for the fund manager with worse performance. The smaller the management scale is, the higher the probability to be promoted for the fund manager with better performance. 4) The performance of fund managers is not sustainable before and after “Promotion”. This paper enriches the literature in the field of fund governance and reflects the shortcomings of performance evaluation and compensation system designing in China’s public fund industry, which can be used as a reference for the future development of fund industry.