Are Style Rotating Funds Successful at Style Timing? Evidence from the US Equity Mutual Fund Market

33 Pages Posted: 24 Feb 2016

See all articles by Adam James Corbett

Adam James Corbett

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Date Written: February 2, 2016

Abstract

Are managers who style-rotate successful at timing style shifts? Or, does this type of activity erode fund value? It is well documented that fund styles exposures vary over time, whether it be a result of passive style drift or strategic changes by managers to capitalise on broad style movements. It is therefore reasonable to expect that funds with high style rotation ought to be capable of timing broad style movements. This paper investigates whether funds that frequently change investment styles are capable of timing style movement, and how this behaviour influences performance. Time-varying fund style exposures are estimated for a sample of US domestic equity mutual funds from a dynamic state-space factor model as well as from a holdings-based approach. Style-timing ability is measured from four-factor Treynor-Mazuy and Henriksson-Merton models. The results show that funds that more aggressively rotate portfolios across market, size, value and momentum exposures are less capable of timing movements in these respective style categories and as such perform worse than those that maintain consistent style exposures.

Keywords: Performance evaluation, Mutual funds, Style rotation, Style timing

Suggested Citation

Corbett, Adam James, Are Style Rotating Funds Successful at Style Timing? Evidence from the US Equity Mutual Fund Market (February 2, 2016). Available at SSRN: https://ssrn.com/abstract=2736672 or http://dx.doi.org/10.2139/ssrn.2736672

Adam James Corbett (Contact Author)

The University of Sydney - Discipline of Finance ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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