Mutual Fund Style Timing Skills and Alpha

35 Pages Posted: 12 Feb 2009 Last revised: 17 Dec 2009

See all articles by Diana Budiono

Diana Budiono

Syntrus Achmea Asset Management

Martin Martens

Erasmus University Rotterdam (EUR); Robeco Asset Management

Date Written: November 24, 2009

Abstract

Selecting mutual funds on only alpha or a single style timing skill (e.g. market timing) leads to overestimating the loading on the selected characteristic and a negative bias towards other characteristics. Consequently, ex-post performance of the top decile is often weak. By estimating for each fund simultaneously alpha and style timing skills over its complete ex-ante available history based on daily returns we achieve two important results. First, the estimated alphas and style timing loadings of the top decile are estimated more accurately. Second, the ex-post performance of the top decile is superior to that of deciles selected on a subset of characteristics, using monthly data or a shorter estimation window.

Keywords: mutual funds, style timing skill, alpha

JEL Classification: G11, G14, G19

Suggested Citation

Budiono, Diana Patricia and Martens, Martin P.E., Mutual Fund Style Timing Skills and Alpha (November 24, 2009). Available at SSRN: https://ssrn.com/abstract=1341740 or http://dx.doi.org/10.2139/ssrn.1341740

Diana Patricia Budiono (Contact Author)

Syntrus Achmea Asset Management ( email )

PO box 3183
Utrecht, 3502 GD
Netherlands

Martin P.E. Martens

Erasmus University Rotterdam (EUR) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31 10 408 1253 (Phone)
+31 10 408 9162 (Fax)

Robeco Asset Management ( email )

Rotterdam, 3011 AG
Netherlands

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