Structured Beliefs and Fund Performance: An LLM-Based Approach

Leveraging the unprecedented capabilities of Large Language Models (LLMs) to assess sentiment across different topics within the same text, we extract the structured beliefs of all mutual fund managers in China based on their reports spanning 2008 to 2023, regarding the economy, government policies, and financial markets. Specifically, we construct a measure for countercyclical policy (CCP) beliefs, where managers anticipate that government policies will counteract economic shocks. We find that funds exhibiting frequent CCP beliefs (CCP funds) significantly outperform other funds. To explain this superior performance, we demonstrate that CCP funds’ market beliefs have stronger predictive power for market returns, their asset allocations show a stronger correlation with their market beliefs, and their performance is directly linked to their time-varying CCP beliefs.