Time-Varying Fund Manager Skill
43 Pages Posted: 28 Sep 2012
Date Written: July 2012
How to evaluate a fund managers skill is a central question in empirical finance. Prior literature has defined skill as an ability to either pick stocks or time the market, at all times. We propose a new definition of skill as a general cognitive ability used in different ways at different times. We find evidence for stock picking in booms and for market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new metric of managerial ability that can be constructed in real time and can predict fund performance. The metric gives more weight to a funds market timing in recessions and to a funds stock picking in booms, and it displays far more persistence than either market timing or stock picking alone.
Keywords: BUSINESS CYCLE, MUTUAL FUNDS, SKILLS
JEL Classification: G00, G11, G2
Suggested Citation: Suggested Citation