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Mutual Fund Market Timing Worldwide

Posted in Investing Expertise, Mutual/Hedge Funds

How successful are active equity mutual fund managers in timing their domestic markets worldwide? In their August 2014 paper entitled “Market Timing Around the World”, Javier Vidal-Garcia, Marta Vidal and Duc Khuong Nguyen employ daily returns to measure the effectiveness of mutual fund market exposure adjustments made more frequently than monthly. They also examine fund timing performance under different economic conditions. Their fund universe consists of 8,680 actively managed, open-end, diversified, domestic live and dead equity mutual funds registered in 35 countries (about 69% are U.S.-registered). Using daily total returns in local currencies and characteristics for these funds, along with contemporaneous country economic data, during January 1990 through December 2013, they find that:

  • The average daily return of all mutual funds over the entire sample period is -0.065%, compared to -0.072% for the country indexes.
  • Based on daily returns, a little over one third (about one fifth) of mutual funds exhibit significantly positive (negative) market timing performance. Use of daily rather than monthly returns increases the percentage of funds with significant timing performance.
  • Fund managers tend to increase cash levels and reduce portfolio betas during recessions. This tendency is much stronger among the most successful market timers. 
  • Successful market timers tend to concentrate among relatively large funds in the small-capitalization style category.

In summary, evidence suggests that some mutual fund managers have market timing ability, and the benefits of this ability concentrate during economic recessions.

Cautions regarding findings include:

  • The modeling approach is fairly complex and not clearly exploitable by investors seeking superior mutual funds. The study does not address economic significance of timing ability.
  • The study does not investigate persistence of market timing ability for individual fund managers.
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