An Investigation of Trust in Chinese Mutual Funds Investment

The paper investigates the role of trust in fund managers’ investment process. Three types of trust personal trust, organizational trust and system trust have been identified in Chinese fund managers’ investment practice. The impacts of different types of trust on mutual funds’ performance are then examined empirically. Through an in-depth investigation of 96 actively managed Chinese mutual funds, this paper reveals how trust is formed between fund managers and listed companies. Fund managers’ portfolio performance is measured using both risk-adjusted measurement and simple absolute returns. The performance of fund managers’ market timing is also provided. Using cross-sectional regression analysis, a positive relationship is found between Chinese fund managers’ portfolio performance and personal trust, while a negative association emerges between fund mangers’ performance and system trust. No evidence is found between portfolio performance and institutional trust. Overall, fund managers’ trust building strategies exert significant impact on funds’ performances. One major implication of this paper is that European fund managers should be aware of the local cultural environment should they intend to find Chinese partners in the mutual fund business.