Style Factor Timing: An Application to the Portfolio Holdings of U.S. Fund Managers

60 Pages Posted: 24 Jan 2013 Last revised: 23 Feb 2015

See all articles by David R. Gallagher

David R. Gallagher

Rozetta Institute

Peter Gardner

Plato Investment Management

Camille Schmidt

SuperRatings

Date Written: September 24, 2013

Abstract

This study develops a style rotation model based on quarterly forecasts of style factor returns, across four style categories, generated using market and macroeconomic data. The prescriptions from this model are tested on a sample of U.S. active equity mutual funds’ portfolio holdings. An annual buy-and-hold style timing strategy investing in the factor with the highest forecast return each quarter achieves an average annual excess return of 7.26%, significant at the 1% level over 1981-2011. However, a fund-of-fund timing strategy investing in the funds with the greatest exposure (i.e., the preferred funds) to the style predicted to outperform over the following year does not generate statistically significant DGTW-adjusted performance. The lack of performance is primarily because the long-only funds are by nature unable to fully exploit the long-short style factor returns. This highlights the issue of using long-short portfolio returns, particularly when evaluating fund performance.

Keywords: Mutual Funds, Style Timing, Macroeconomic Data, Investment Performance, Stock Holdings

JEL Classification: G11, G17, G23

Suggested Citation

Gallagher, David R. and Gardner, Peter and Schmidt, Camille, Style Factor Timing: An Application to the Portfolio Holdings of U.S. Fund Managers (September 24, 2013). Australian Journal of Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2206675 or http://dx.doi.org/10.2139/ssrn.2206675

David R. Gallagher (Contact Author)

Rozetta Institute ( email )

Sydney

Peter Gardner

Plato Investment Management ( email )

Level 14, 167 Macquarie St
Sydney, New South Wales 2066
Australia

Camille Schmidt

SuperRatings

Australia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
560
Abstract Views
2,353
rank
69,563
PlumX Metrics