The Market Timing Ability of UK Mutual Funds

Abstract:  We apply a recent nonparametric methodology to test the market timing skills of UK equity and balanced mutual funds. The methodology has a number of advantages over the widely used regression based tests of Treynor-Mazuy (1966) and Henriksson-Merton (1981) . We find a relatively small number of funds (around 1%) demonstrate positive market timing ability at a 5% significance level while around 19% of funds exhibit negative timing and on average funds miss-time the market. However, controlling for publicly available information we find very little evidence of market timing ability based on private timing signals. In terms of investment styles, there are a small number of successful positive market timers amongst Equity Income and 'All Company' funds but not among either Small Stock funds or Balanced funds, although a few small stock funds are found to time a small stock index rather than a broad market index.     

Seasonality, Market Timing and Performance Amongst Benchmarks and Mutual Fund Evaluation

Abstract:  Mutual fund performance is normally measured by comparing results of active management with those obtained by one or several benchmarks that should represent the fund's investment. In this context, this paper examines the effect on mutual fund assessment if a relevant benchmark is omitted. This effect is analysed in three elements of active management: stock selection, market timing, and seasonality. The latter is defined as fund management at specific moments of time with the objective of achieving positive abnormal returns to improve performance. For a sample of Spanish mutual funds, we find that the omission of style benchmarks, particularly that corresponding to small-cap stocks, leads to greater evidence of negative market timing and positive seasonality at year beginning. However, the positive abnormal returns of the seasonality at year end, month end and especially at the beginning of July hold regardless of benchmark omission. The paper therefore also analyses the relation between performance and seasonality, finding that positive seasonality at year beginning and at July beginning improves performance; however, at other moments it implies a possible window dressing strategy in mutual fund management.     

Assessing Selectivity and Market Timing Performance of Mutual Funds for an Emerging Market: The Case of Turkey

This paper derives and analyzes the selectivity and market timing performance of the mutual funds for the Turkish economy for the financial crisis period by employing high-frequency data. The determinants of these derived abilities are investigated within a regression analysis. The results suggest weak evidence about selection ability and some evidence about superior market timing quality. They also indicate that management fees are negatively correlated with the ability measure, which is quite surprising. Experience emerges as an important factor, especially for market timing ability.     

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.     

Market timing and return prediction under model instability

Despite mounting empirical evidence to the contrary, the literature on predictability of stock returns almost uniformly assumes a time-invariant relationship between state variables and returns. In this paper, we propose a two-stage approach for forecasting of financial return series that are subject to breaks. The first stage adopts a reversed ordered Cusum (ROC) procedure to determine in real time when the most recent break has occurred. In the second stage, post-break data is used to estimate the parameters of the forecasting model. We compare this approach to existing alternatives for dealing with parameter instability such as the Bai–Perron method and the time-varying parameter (TVP) model. An out-of-sample forecasting experiment demonstrates considerable gains in market timing precision from adopting the proposed two-stage forecasting method.     

我国开放式基金的证券选择和市场时机把握能力研究

运用参数检验方法对我国42只股票型开放式基金的证券选择和市场时机把握能力进行了分年度检验,结果发现,开放式基金在2003年具有较强的证券选择能力,但不具备市场时机把握能力,在2004年上半年显示出了一定的市场时机把握能力,却从总体上表现出负向证券选择能力.基于2003年的基金年报分析显示,开放式基金在对未来市场趋势的预测上存在明显的"羊群行为".     

Why is timing perverse?

The existence of negative market timing, even for passive portfolios, poses a relevant puzzle when assessing portfolio management. In this paper, we develop a simple theoretical model so as to explain why such perverse market timing might occur and why those stocks with the lowest beta in upward markets exhibit pronounced negative timing. Our explanation is based on the existence of higher correlations of stocks in down markets than in up markets. We find that changes in beta, which drives timing, has four components; however, just two of these, mean covariance shift and covariances dispersion map, serve to explain the asymmetric behavior across stocks. We find that a high percentage of the negative market timing ability identified for mutual funds in the literature could be explained by this bias.     

Market timing and the debt–equity choice

We test the market timing theory of capital structure using an earnings-based valuation model that allows us to separate equity mispricing from growth options and time-varying adverse selection; thus avoiding the multiple interpretations of book-to-market ratio. We find that equity market mispricing plays a significant, if not dominant, role in the security choice decision. Our results are robust to the inclusion of proxies for time-varying growth options and alternate methods of measuring misvaluation.     

A Portfolio's Country Exposure Management: The Case of Latin American Mutual Funds

This study empirically examines the forecasting ability and performance of Latin American fund managers by evaluating changes in portfolio country exposure. It employs a methodology based on attribution returns. An attribution return is defined as the difference between the actual monthly fund return and the return that would have been generated by the previous month portfolio's country exposure. The study finds three major results. In the aggregate, Latin American fund managers demonstrate forecasting ability as evidenced by a positive and statistically significant attribution return. The fund managers outperform a regional benchmark when measured with Jensen's alpha, and the attribution return is positively correlated with alpha. Attribution returns are mostly negative during periods of financial instability in the region.     

Why Does Performance Persistence Vary Among Closed-End Funds?

This study extends the research on closed-end fund performance persistence by investigating whether the persistence of both net asset value (NAV) and market price returns of U.S. registered closed-end funds is related to various fund characteristics. The sample consists of 505 closed-end funds, which are investigated over the period from January 1976 to December 1996. The analysis tests whether persistence is related to the fund characteristics size, goal, management fees, turnover, fund family membership, fund experience, and the exchange on which a fund is traded. The results vary across holding periods used to calculate persistence but are similar with respect to the NAV and market price returns. Funds with lower expense ratios and funds traded on the NYSE show more persistence of strong NAV and market price performance.     

Relative Performance Evaluation of Mutual Funds: A Non-Parametric Approach

We propose an alternative mutual fund performance index which addresses the benchmark problem and controls for economies of scale in managing mutual funds. We advance a new concept of 'return-cost' efficiency as another important element in evaluating portfolio management, in addition to the mean-variance efficiency concept. Our index based on a non-parametric estimation is shown to be similar to the Sharpe index with multiple slopes (or factors). We have shown that all fund categories, except income funds, have similar average efficiency scores after controlling for economies of scale. Most funds operate in increasing returns to scale and seem to be successful in holding mean-variance efficient portfolios, but unsuccessful in allocating transaction costs efficiently, evidenced by excessive turnovers and loads.     

Running From a Bear: How Poor Stock Market Performance Affects the Determinants of Mutual Fund Flows

Abstract:  Using a proprietary data set to study how past performance affects the determinants of mutual fund flows for a sample of load fund investors, I provide evidence that the determinants of fund flow depend on market conditions for both redemptions and purchases. Specifically, I show that, for redemptions, relative performance and risk adjusted performance are important determinants during a period of record flows into mutual funds. Conversely, during a period of poor performance, absolute performance becomes much more important and relative performance and risk adjusted performance become less important. For purchases, absolute performance, risk adjusted performance, and most relative performance measures become more important during the bear market.     

Multi-asset class mutual funds: Can they time the market? Evidence from the US,UK and Canada

The importance of asset allocation decisions in wealth management is well established. However, given its importance it is perhaps surprising that so little attention has been paid to the question of whether professional fund managers are skilful at timing market movement across asset classes over time. The timing literature has tended to concentrate on the timing skill of single asset class funds. Using data on US, UK and Canadian multi-asset class funds, we apply two alternative methodologies to identify the asset class timing abilities of managers. Overall, whether we apply a returns-based method or a holdings-based testing approach, we find evidence of only a tiny minority of funds with asset class timing ability.     

Seasonal Patterns in Money Market Mutual Funds

This study analyzes seasonal patterns in tax-exempt and taxable money market mutual fund yields. We document a significant increase in tax-exempt and taxable yields during the last three weeks of December, followed by a significant decrease in yields during the first three weeks of January. The yield changes are associated with a corresponding outflow of fund assets at the end of the year and inflow of assets in the beginning of the year. We also find that tax-exempt yields change systematically around the 15th of April, June and September, which are key individual income tax dates. These results are consistent with liquidity effects associated with year-end wages, dividends, and bonus payments and tax-effects. We also find that institution window dressing contributes to the year-end movements in taxable and tax-exempt fund yields. One implication is that municipalities planning to issue short-term notes and investors in these funds can time their actions to take advantage of these systematic yield changes.     

Risk-Adjusted Performance of Mutual Funds: Evidence from China

In this article, we evaluate the performance of mutual funds in China between 2006 and 2014. We first estimate time-varying abnormal returns of each mutual fund using an active peer benchmark-augmented factor pricing model. An index of riskiness is then estimated and used to calculate the augmented performance measure (APM). By construction, the APM separates the managerial premium of the fund from systematic risk premium, so it is better than the economic performance measure. The APM incorporates information beyond the first and second moments of the distribution of fund abnormal return; therefore, it is more informative than the Sharpe ratio.     

A multivariate nonparametric test for return and volatility timing

This paper develops a novel approach to simultaneously test for market timing in stock index returns and volatility. The tests are based on the estimation of a system of regression equations with indicator variables and provide detailed information about the statistical significance of alternative market timing components.     

Stability, Asymmetry and Seasonality of Fund Performance: An Analysis of Australian Multi‐sector Managed Funds

Using a sample of Australian Multi-sector trusts we examine selectivity and market timing performance and extend the analysis to include the relatively new measure of volatility timing. This is of particular relevance to our data set, as high levels of volatility persistence are prevalent in Australia. In addition we consider the stability, asymmetry and seasonality of the various performance and risk measures. A survivorship adjustment procedure is also employed in order to assess the impact of survivorship on selectivity, market timing and volatility timing performance.