Investment Managers and Market Timing

Do professional money managers as a group successfully time the stock market? The National Association of Active Investment Managers (NAAIM) is an association of registered investment advisors who provide active money management services to their clients. Each week, NAAIM surveys conducts a Survey of Manager Sentiment, asking member firms “to provide a number which represents their overall equity exposure at the market close on…Wednesdays. Responses can vary [from 200% short to 200% long]. Responses are tallied and averaged to provide the average long (or short) position of all NAAIM managers, as a group.” Using historical weekly survey data and contemporaneous weekly returns for the S&P 500 Index over the period July 2006 through May 2011 (256 surveys), we find that:

The data available for download from NAAIM include weekly S&P 500 Index closes for the Fridays after the Wednesdays referenced above. To align the surveys with index behavior, we substitute index closes for Wednesdays.

The following chart compares the weekly average investment posture of NAAIM survey respondents to the weekly level of the S&P 500 Index over the entire sample period. It appears that the two series generally track, but the relatively high volatility of the average investment posture makes comparison by visual inspection very difficult.

To test the aggregate foresight of survey respondents, we compare average investment posture to future stock market return at the survey frequency.

The following scatter plot relates the S&P 500 Index next-week return to the weekly NAAIM average investment posture over the entire sample period. The Pearson correlation for the two series is 0.01 and the R-squared statistic 0.00, indicating no relationship between average investment posture and future stock market return. In other words, the average investment posture offers no information about the stock market return the following week.

In case there is a useful non-linearity in the relationship, we consider average future stock market return by quintile of average investment posture.

The next chart depicts the average S&P 500 Index next-week return by quintile of NAAIM average investment posture (55 observations per quinitile) over the entire sample period. The average weekly return for all weeks is 0.05%. There is no regular progression of average returns across all quintiles. While the lowest sentiment quintile has the lowest returns, the top two quintiles also have low returns. The best returns occur in weeks after sentiment measures are near the sample median.

Also, the average S&P 500 Index next-week return for the top and bottom halves of the entire sample are 0.1% and 0.0%, respectively.

Do survey respondents react systematically to past returns?

The final chart relates the S&P 500 Index last-week return to the weekly NAAIM average investment posture over the entire sample period. The Pearson correlation for the two series is 0.14 and the R-squared statistic 0.02, suggesting that survey respondents on average have a slight tendency to take a more bullish (bearish) posture after up (down) weeks for the stock market.

NAAIM notes the following reservations about the reliability of inference from this data:

• “Use of a single, composite number for each adviser may not accurately represent the market view of a manager who has short term and long term strategies that are providing conflicting signals or a manager who uses both contra-trend and trend following strategies for different portfolios.”
• “Investment Styles very widely among managers participating in this survey. They may include managers that trade very frequently and can switch long and short positions daily. Other managers stay fully invested at all times and only change allocations among market segments or sectors. Still others trade around core positions and only a portion of their portfolios change, but that portion could potentially go from long to short very quickly.”
• “Although the number of participating managers, known as NAAIM Trend Setters, is steadily growing the sample size is not large…”

In summary, evidence from simple tests on NAAIM survey data does not support a belief that the money managers as a group successfully time the stock market over the short term.

The above tests are of short-term stock market timing performance only and not of long-term allocation decisions or asset selection, which might produce portfolio outperformance even without successful short-term timing. The sample is not long enough to test long-term timing.

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