Market Timing and Crash Timing: Predicting Aggregate Market Returns with Mutual Fund Holdings

Abstract

If mutual fund managers have aggregate market timing ability, their holdings should predict aggregate market returns. I use prior timing track records to identify funds likely to have timing skill, and I show that the holdings of these funds predict aggregate market returns at 3-, 6-, and 12-month horizons, both in univariate specifications and in specifications that control for other predictive public signals. The period 2000-2002 is crucial to these and related market timing results. For this important subperiod, I show that managers' timing records from the previous five years predict portfolio adjustments in anticipation of the subperiod's market returns, controlling for characteristics such as fund size and investment style. I extend the sample to include the recent low market returns of 2008 and find similar, though weaker, results. I conclude that the data are consistent with a subset of mutual fund managers having timing ability, but that the data are unable to distinguish between the continuous exercise of timing ability and the exercise of timing ability only during episodes of unusually dramatic and persistent market returns.

Keywords: mutual funds, market timing, holdings, predictability

JEL Classification: G11, G14, G23