Dynamic Segment Timing and the Predictability of Actively Managed Mutual Fund Returns

35 Pages Posted: 29 Feb 2016

See all articles by Jason C. Hsu

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Vitali Kalesnik

Research Affiliates LLC

Brett W. Myers

Texas Tech, Rawls College of Business

Ryan J. Whitby

Utah State University - Huntsman School of Business

Date Written: February 26, 2016

Abstract

We use a holdings-based attribution model to disaggregate the benchmark-adjusted returns to U.S. equity mutual funds into components that reflect persistent segment tilts, the timing of segment returns, and stock selection relative to their benchmarks. We find that large-cap funds add value by timing segment returns, while small-cap funds add value by picking stocks. Overall, we find that active managers underperform their benchmarks when it comes to allocating to market segments (based along size, style, and industry dimensions). Further, we find that managers who have successfully timed market segment returns in the past generate higher benchmark-adjusted returns and factor alphas in the future, and that this is especially true for funds with a high active share measure. We argue that dynamic segment timing represents a type of manager skill that is not easily replicable.

Keywords: Mutual fund, mutual fund return predictability, mutual fund investment, active management

JEL Classification: G11

Suggested Citation

Hsu, Jason C. and Kalesnik, Vitali and Myers, Brett W. and Whitby, Ryan J., Dynamic Segment Timing and the Predictability of Actively Managed Mutual Fund Returns (February 26, 2016). Available at SSRN: https://ssrn.com/abstract=2738818 or http://dx.doi.org/10.2139/ssrn.2738818

Jason C. Hsu

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Vitali Kalesnik

Research Affiliates LLC ( email )

620 Newport Center Dr
Ste 900
Newport Beach, CA 92660
United States
949-325-8717 (Phone)
949-325-8917 (Fax)

HOME PAGE: http://researchaffiliates.com/index.htm

Brett W. Myers (Contact Author)

Texas Tech, Rawls College of Business ( email )

Lubbock, TX 79407
United States

Ryan J. Whitby

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
435.797.9495 (Phone)

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