Style Factor Timing: An Application to the Portfolio Holdings of US Fund Managers

Posted: 6 Jun 2015

See all articles by David R. Gallagher

David R. Gallagher

Rozetta Institute

Peter Gardner

Plato Investment Management

Camille Schmidt

SuperRatings

Date Written: May 1, 2015

Abstract

This study develops a style rotation model based on quarterly forecasts of style factor (SF) returns, across four style categories, generated using market and macroeconomic data. The prescriptions from this model are tested on a sample of US 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 during 1981-2011. However, a fund-of-fund (FoF) 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 Daniel, Grinblatt, Titman and Wermers (DGTW)-adjusted performance. The lack of performance is primarily because the long-only funds are by nature unable to fully exploit the long-short SF returns. This highlights the issue of using long-short portfolio returns, particularly when evaluating fund performance.

Keywords: Investment performance, macroeconomic data, mutual funds, stock holdings, style timing

Suggested Citation

Gallagher, David R. and Gardner, Peter and Schmidt, Camille, Style Factor Timing: An Application to the Portfolio Holdings of US Fund Managers (May 1, 2015). Australian Journal of Management, Vol. 40, No. 2, 2015, Available at SSRN: https://ssrn.com/abstract=2614528

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

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