Beliefs That Predict Returns and Beliefs That Attract Flows: Policy Insights and Sentiment Catering in Mutual Funds

Using mandatory Outlook reports from Chinese mutual funds, we decompose each fund’s equity-market beliefs into macro fundamentals, government policy, and residual sentiment. Policy beliefs, rather than macro beliefs, predict subsequent market returns and help explain the positive alphas observed in China’s mutual fund industry. By contrast, residual sentiment strongly shapes equity allocations and attracts investor flows, even though it does not predict returns. Using maturing wealth management products as an instrument for future aggregate fund flows, we show that funds strategically position their stated beliefs to cater to investors. Overall, our analysis reveals a core tension in active asset management: skilled managers generate performance through policy insights while attracting flows through sentiment alignment.