The Market-Timing Performance of Mutual Fund Managers

Abstract

The theory and measurement of the investment performance of managed portfolios has received a great deal of attention in the financial economics literature. 1 The topic is important to potential clients, managers evaluating the effectiveness of their strategies, and regulators that formulate policy concerning the operations of the marketplace. The Jensen (1968, 1969) model of riskadjusted performance has been the premier methodology for addressing these issues and testing the strong form of the efficient markets hypothesis (that is, whether any market participant has monopolistic access to any information relevant for price formation). The investment management process can be dichotomized into the activities of stock selection and market timing. Stock selection is based on forecasts of company-specific events and hence the prices of individual securities. Market timing, however, refers to forecasts of future This paper proposes an empirical methodology for measuring the market-timing performance of an investment manager and provides evidence for a sample of mutual funds. The results indicate that at the individual fund level there is evidence of significant superior timing ability and performance. However, the multivariate tests were not inconsistent with the efficient markets hypothesis. That is, fund managers as a group have no special information regarding the formation of expectations on the returns of the market portfolio.