Follow the smart money: Factor forecasting in China

Abstract We present novel evidence of factor timing in the Chinese stock market. Actively managed Chinese stock mutual funds have larger exposure to the size factor when it performs well and smaller exposure when it performs poorly. By constructing a proxy for the size preference of active stock funds, we can forecast size factor returns in the subsequent periods. A one-standard-deviation increase in the size factor loading of active stock funds is associated with an increase in the size factor return of 1.2% in the next month and 10.8% in the next year. The result is not driven by industry rotation, price impact of mutual funds, or factor momentum. Actively managed stock mutual funds do not appear to time value or momentum factors.