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

See all articles by Anders G. Ekholm

Anders G. Ekholm

Lappeenranta University of Technology (LUT)

Date Written: January 26, 2012

Abstract

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

Ekholm, Anders G., Portfolio Returns and Manager Activity: How to Decompose Tracking Error into Security Selection and Market Timing (January 26, 2012). Journal of Empirical Finance, Vol. 19, No. 3, 2012; 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1302329 or http://dx.doi.org/10.2139/ssrn.1302329

Anders G. Ekholm (Contact Author)

Lappeenranta University of Technology (LUT) ( email )

Lappeenranta
Finland

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