Dynamic Segment Timing and the Predictability of Actively Managed Mutual Fund Returns
35 Pages Posted: 29 Feb 2016
Date Written: February 26, 2016
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
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