Portfolio Returns and Manager Activity: How to Decompose Tracking Error into Security Selection and Market Timing
25 Pages Posted: 18 Nov 2008 Last revised: 12 Sep 2013
Date Written: January 26, 2012
We develop a new method for detecting portfolio manager activity. Our method relies exclusively on portfolio returns and, consequently, avoids the pitfalls associated with disclosed portfolio holdings. We investigate the interrelation between activity and performance of actively managed U.S. equity funds from 2000 to 2007 and document robust evidence that future performance is positively related to past stock picking and negatively associated with past market timing. Finally, we find that portfolio manager activity is highly persistent over time, which supports the conclusion that stock picking increases performance while market timing decreases performance.
Keywords: security selection, stock picking, market timing, performance, tracking error
JEL Classification: G10, G11, G20, G23
Suggested Citation: Suggested Citation