What skills do star fund managers possess?
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Chen2010.doc (5.885Mb)
Date
17/02/2010Author
Chen, Li-Wen
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Abstract
Kosowski, Timmermann, Wermers, and White (2006) find that certain
growth-oriented fund managers have substantial skill but do not stipulate the
particular skills that they possess. I use novel style timing models to examine in
detail the timing skills of 3,181 US equity mutual funds classified as having a
growth investment objective by Standard & Poor’s, over the period from 1993 to
2006. To control for idiosyncratic variation in mutual fund returns, the bootstrap
method of Kosowski et al. is used to analyze the significance of alpha and timing
coefficient estimates. To exclude the possibility that the observed timing ability is
due to good luck, synthetic funds are examined as in Busse (1999). The results
indicate that growth-oriented fund managers who earn abnormal returns demonstrate
substantial growth timing skill, i.e. successful timing activity across the
value/growth continuum. This observed growth timing ability accounts for at least
45% of abnormal returns and is persistent; the top 10% of funds which demonstrate
growth timing ability in the past three years also demonstrate the best growth timing
ability in the following year. Successful growth timing is confined to those managers
who invest primarily in growth stocks. However, there is little evidence of
successful market timing (i.e. forecasting future market states and weighting equity
exposure accordingly), size timing (i.e. adjusting exposure between small and large
capitalization stocks) or momentum timing (i.e. switching between momentum
investing and contrarian investing strategies). The models employed clearly
distinguish between growth timing and market timing skills, thereby avoiding a
common misidentification problem.