Selectivity and Market Timing Performance of Fidelity Sector Mutual Funds

In this paper, we test the selectivity and timing performance of the Fidelity sector mutual funds during the 1989–1998 time period. We use the S&P 500, the Dow Jones Industry Group Total Return Indexes, and the Dow Jones Subgroup Total Return Indexes as benchmarks. When we use the Dow Jones Industry benchmarks, our results indicate that many sector fund managers have positive selectivity but negative timing ability. We also find that the results are sensitive to our choice of benchmark and timing model.     

An Intertemporal CAPM Approach to Evaluate Mutual Fund Performance

Merton (1973) and Campbell (1993) have demonstrated that if an investor anticipates information shifts, he will adjust his portfolio choice today in an attempt to hedge these shifts. Exploiting these insights, we construct a new performance measure to evaluate fund managers' hedging ability. This new measure is different from two widely adopted performance evaluation measures: securities selectivity and market timing. Moreover, an econometric methodology is developed to simultaneously estimate the magnitudes of these three portfolio performance evaluation measures. The results show that mutual fund managers are on average with positive security selection and negative market timing ability. Furthermore, the mutual funds with investment style classified as Asset Allocation generally have positive hedging timing ability.     

Timing and selectivity in Portuguese mutual fund performance

We extend the international evidence on timing and selectivity skills of fund managers by applying the Henriksson and Merton [Henriksson, R., Merton, R., 1981. On market timing and investment performance. II. Statistical procedures for evaluating forecasting skills. J. Bus. 54, 513–533] model to Portuguese based mutual funds investing in local, European and International equity.

The results show that managers do not exhibit selectivity and timing abilities, and there is even some evidence of negative timing. Furthermore, we observe a distance effect on stock selection performance, since fund managers that invest locally seem to perform better that those who invest in foreign markets. However, this effect is reverted with respect to market timing skills of fund managers, suggesting that International fund managers are more focused in market timing strategies.     

Performance aspects of Greek bond mutual funds

This paper examines the performance characteristics of Greek bond funds and the impact of fund flows on portfolio returns. The evidence shows that on average bond funds do not offer risk-adjusted profits exceeding the returns of the benchmark index, which is in consistence with the US and international evidence. Returns before fees are slightly superior to the returns of the benchmark index, but when fees are considered they lag considerably. The security selection and market timing skills of fund managers are also tested using both an unconditional and a conditional model to test for the impact of public information variables. We also find that fund flows impact negatively on market timing.     

The Impact of Investment Constraints on Portfolio Performance Measurement: The Power Utility Function Case

This paper examines the effect of investment constraints on performance measurement of institutionally managed funds. Assuming that these funds have a power utility function and using an optimal portfolio choice model, one can show that the Security Market Line remains a valid benchmark for these constrained funds under the perfect market assumption. Relaxing the perfect market assumption, one can prove that a non-stationary constrained investment policy will bias traditional measures of timing ability differently across managers types. Finally, the magnitude of this bias is illustrated with a numerical example.     

Measuring bond mutual fund performance with portfolio characteristics

This paper studies the performance of U.S. bond mutual funds using measures constructed from a novel data set of portfolio weights. Active fund managers exhibit outperformance before costs and fees generating, on average, gross returns of 1% per annum over the benchmark portfolio constructed using past holdings (approximately the same magnitude as expenses and transaction costs combined). This suggests that fund managers are able to earn back their fees and costs. There is evidence of neutral ability to time different portfolio allocations (sector, credit quality, and portfolio maturity allocations) and only a subgroup of bond funds exhibit successful timing ability. One performance measure based on portfolio holdings predicts future fund performance and provides information not contained in the standard measures. These results provide the first evidence of the value of active management in bond mutual funds.     

Performance evaluation of balanced pension plans

This paper examines the ability of balanced pension plan managers to successfully time the equity and bond market and select the appropriate assets within these markets. In order to evaluate both market timing abilities in these balanced pension plans, we extend the traditional equity market timing models to also account for bond market timing. As far as we know, we are among the first to apply this multifactor timing model to investigate equity and bond market timing simultaneously. This performance evaluation has been conducted on two samples of Spanish balanced pension plans, one with Euro Zone and one with World investment focus. This allows us to decompose managers’ skills into three components: selectivity, equity market timing, and bond market timing. Our findings suggest that the average stock-picking ability of pension plans is positive. World schemes tend to have positive bond timing skills, while Euro Zone pension plans are on average not able to time equity or bond markets.     

A tale of feedback trading by hedge funds

This paper studies the extent of feedback trading at the factor level by hedge fund managers. We show that fund managers continuously adjust their exposure to different risk factors conditional on the recent performance of these factors. The majority of managers apply a positive feedback strategy, whereas the remaining managers use a negative feedback strategy. In addition, we find some evidence for factor timing ability, although managers appear to be more backward looking than forward looking. We show that positive feedback trading can be beneficial to fund performance in our setup. If managers applied the positive feedback strategy more aggressively, however, they could benefit more from it. As such, the “smart switching benchmark” can be used to assess the risk-adjusted performance of hedge funds.     

Estimating the performance attributes of Australian multi-sector managed funds within a dynamic Kalman filter framework

This paper examines the impact of Kalman filtering as a technique for modeling the risk levels of managed funds. Using a sample of Australian Multi-sector trusts we examine selectivity and market timing performance using conventional performance models alongside Kalman filter models that allow beta to vary via a random walk. Further, we consider the stability and asymmetry of these performance measures together with a measure of volatility timing arising from a cubic model of fund performance. We find that the positive selectivity (negative market timing) that stems from the conventional models is not present with the Kalman filter model. The Kalman filter model tends to show neutral performance for both. However, both models confirm a strong tendency toward negative volatility timing.     

IPO market timing. The evidence of the disposition effect among corporate managers

Until now, IPO market timing has been mostly associated with a varying number of IPOs in certain periods of “hot” and “cold” issue markets. We would like to offer a different perspective. We focus on a speed of the IPO process, after the decision to go public was actually made. Our hypothesis is that in “hot market” managers will tend to minimize the time necessary to go public in order to take advantage of high valuations as quickly as possible. On the contrary, if the firm is not ready with the IPO on time and in the meantime the market falls during the going-public process, managers will tend to delay the IPO hoping that the good market conditions will come back soon. We argue that such a behavior might be attributed to the disposition effect among firms' managers.We find a statistically significant negative correlation between the market return and the speed of the IPO process. The absolute correlation coefficient is higher when the market return is calculated 90 days prior to the Approval Date of the prospectus than when it is calculated 90 days after the Approval Date. Hence, a vast part of the market influence on the speed of the offering process has its origin at the time when offering is formally not possible yet. External factors occurring after the Approval Date seem to be less important than the managerial decision influenced by observation of the market situation prior to the Approval Date.We also find that for firms débuting faster than the median of our sample, the average market return in the period between the IPO date and the median is positive. On the other hand, in the group of slower firms, the average market return in the period between the median and the IPO date is negative. There is an analogy between firms – débuting too fast in bullish market and too slow in bearish market, and investors – selling winning stocks too quickly and keeping falling stocks for too long in their portfolios. Both managers and investors seem to be biased by the S-shape utility function, as predicted by the prospect theory of Kahnemann and Tversky (1979).     

Derivative use,fund flows and investment manager performance

Prior literature which examines the use of derivatives by investment managers does not discern between different types of derivative trading strategies. This study is the first to examine and gather data on a particular type of derivative trading strategy undertaken by investment managers. We examine the extent to which equity fund managers use index futures to manage fund flows and the effect this has on their alpha and market timing measures of performance. Our results show that funds that do not use derivatives exhibit lower returns and negative market timing skills when they experience fund flow. The performance of funds that use derivatives, however, is independent of investor’s liquidity demands. In fact, the unconditional performance of the average user fund is statistically equivalent to the performance of the average non-user fund conditional on zero fund flow. Our results provide evidence that derivatives can be beneficial for mutual fund holders under certain conditions.     

Revisiting mutual fund performance evaluation

Mutual fund manager excess performance should be measured relative to their self-reported benchmark rather than the return of a passive portfolio with the same risk characteristics. Ignoring the self-reported benchmark results in different measurement of stock selection and timing components of excess performance. We revisit baseline empirical evidence fund performance evaluation utilizing stock selection and timing measures that incorporate the self-reported benchmark. We introduce a new factor exposure based approach for measuring the – static and dynamic – timing capabilities of mutual fund managers. We overall conclude that current studies are likely to be misstating skill because they ignore the managers’ self-reported benchmark in the performance evaluation process.     

International mutual fund selectivity and market timing during up and down market conditions

This study examines the selectivity and market-timing ability of international mutual fund managers. Ninety-seven international mutual funds with a minimum of five-year return history selected from the Morningstar OnDisc database are analyzed. Our findings suggest that managers of international mutual funds possess good selectivity and overall performance. We also find weak evidence of poor market-timing ability. Consistent with prior findings from domestic mutual funds, there is a negative correlation between the international fund managers' selection ability and market-timing ability. Finally, managers for Europea funds show poorer performance than those managing the other three international fund groups.     

Carrot and stick: A role for benchmark-adjusted compensation in active fund management

Investors delegating their wealth to privately informed managers face not only an intrinsic asymmetric information problem but also a potential misalignment in risk preferences. In this setting, we show that by tying fees symmetrically to the appropriate benchmark investors can tilt a fund portfolio toward their optimal risk exposure and realize nearly all the value of managers’ information. They attain these benefits despite an inherent inefficiency in the choice of the benchmark, and at no extra cost of compensating managers for exposure to relative-performance risk. Under certain conditions, benchmark-adjusted performance fees are necessary to prevent passive alternatives from dominating active management. Our results shed light on a recent debate on the appropriate fee structure of active funds in contexts of high competition from passive funds.     

Asset Allocation and Selectivity of Asian Mutual Funds During Financial Crisis

This paper evaluates the ability of US-based Asian mutual fund managers in coping with the 1997 Asian financial crisis. We find that the actively managed mutual funds under-perform with respect to the market portfolio by 1.71% in average monthly return. Such poor performance is caused by fund managers' relative weakness in country selection as well as in stock picking. Fund managers are also found to be more skillful in picking the correct market when the market is going up than going down. Our results are consistent with the literature that asset allocation in Asian mutual funds is a dominating factor relative to selectivity in explaining fund returns during the financial crisis. In addition, there exists a negative relation between asset allocation ability and selectivity of fund managers.     

Time-varying fund manager skills of socially responsible investing (SRI) funds in developed and emerging markets

We examine stock selectivity and timing abilities in the market-wide return, volatility and liquidity of SRI fund managers. We find that multi-dimensional fund manager skills are time-varying and persistent in the short run, with developed market funds exhibiting longer persistence in all dimensions. Fund manager skills tend to be affected by fund characteristics (i.e., expense ratio, fund size, turnover and management tenure) and market characteristics (i.e., ESG market capitalization, mandatory ESG regulation and 10–2 yield spread). Fund managers of developed (emerging) market funds outperform (underperform) the market indices. For both fund types, fund managers possess exceptional volatility and liquidity timing despite poor return timing. Moreover, fund managers focus more (less) on timing the market’s return and less (more) on picking stocks when the prospect of recession keeps increasing (decreasing). Interestingly, if fund managers attempt to time the market-wide return or liquidity, stock selectivity will be worsened by their timing behavior.     

AN EMPIRICAL TEST OF THE TIMING OF BOND-REFUNDING DECISIONS

In this paper we measure the ability of firms to time bond-refunding decisions. The timing performance achieved on a sample of 161 public utility bond refundings is compared with the timing performance achieved by three benchmark models. We find that firms achieve levels of timing performance significantly better than the random selection and 100-basis-point benchmark models, but not significantly better than a stopping-time model based on present value analysis.     

The Timing and Stock Selection Abilities of Bank Funds: Evidence Based on Meta-Analysis

This study investigates the risk-adjusted investment performance of the equity portfolios of bank trust departments, over the 1975–1992 period, attributable to their micro stock selection and macro market timing abilities. This paper first employs a widely known parametric statistical procedure developed by Henriksson and Merton to test jointly for the presence of either superior stock selection or market timing abilities. The paper then utilizes an alternative technique, called meta-analysis, to further examine the regression results obtained under the Henriksson–Merton model. The meta-analysis essentially eliminates such study artifacts as sampling and measurement errors through cumulation of results across studies. The findings of the joint test, based on the Henriksson–Merton model, do not support either superior stock selection abilities or market timing skills on the part of bank equity fund managers: selectivity measures are positive and timing measures are generally negative, but both measures are statistically insignificant. In contrast, the evidence based on the meta-analysis suggest that the managers of bank equity investment funds possess superior stock selection abilities and somewhat negative timing skills. Therefore, the results of this study suggest that, even though bank trust departments, like other categories of institutional investors, are unable to outperform a passive buy and hold investment strategy through timing the equity market, they are able to improve their investment performance through superior stock selection abilities.     

我国QDII基金经理的选股择时能力研究

本文选取2009年前成立的8只QDII基金为研究样本,以2009年和2010年的周度数据为基础,采用TM和CL模型对QDII基金经理的选股能力和择时能力进行实证分析。实证结果表明,我国QDII基金经理的选股择时能力不具有持续性。2009年有较强的选股能力和择时能力,2010年有一定的选股能力,但是缺乏择时能力。进一步分析,QDII基金经理的选股择时能力的显著性都不强。     

Time‐Varying Fund Manager Skill

We propose a new definition of skill as general cognitive ability to pick stocks or time the market. We find evidence for stock picking in booms and market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new measure of managerial ability that weighs a fund's market timing more in recessions and stock picking more in booms. The measure displays more persistence than either market timing or stock picking alone and predicts fund performance.