Time‐Varying Fund Manager Skill

Abstract

We propose a new definition of skill as general cognitive ability to pick stocks or time the market. We find evidence for stock picking in booms and market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new measure of managerial ability that weighs a fund's market timing more in recessions and stock picking more in booms. The measure displays more persistence than either market timing or stock picking alone and predicts fund performance.

The market timing ability and return performance of Islamic equities: An empirical study

“…Kacperczyk et al, (2014) found that both timing and selection skills are not only time varying but also period specific. Furthermore, Mansor et al, (2015) suggest that the evidence of timing skills of Islamic mutual fund managers reported in the existing literature disappears once the time-invariant normality assumption is addressed.…”

“…The major focus remained on the determination of abnormal return through stock selection abilities by using a standard CAPM model or a four-factor CAPM model. Finance literature on the other hand, clearly indicates that outperformance can be attributed to stock selection and/or the market timing ability of portfolio managers (Fama, 1972;Kacperczyk et al, 2014). In the case of IEIs, both stock selection and market timing can be attributed to the Shari'ah screening applied for index construction.…”

“…However, the major focus in existing literature is on the determination of abnormal return through stock selection abilities using Jensen (1967) and market timing skills using Treynor and Mazuy (1967) models 2 . Most of these studies applied ordinary least square (OLS) method for empirical estimation that do not consider the time-1 See for example Angelidis et al, (2013), Baker et al, (2010), Daniel et al, (1997), Bollen and Busse (2011), Fama and French (2010), Pástor and Stambaugh (2002) and Kacperczyk et al, (2014) among several others. 2 See for example Abdullah et al, (2007), Alam and Rajjaque (2010), Hoepner et al, (2009) and Ashraf (2013) among several others.…”

“…Conventional finance literature decompose fund performance into stock selection and market timing ability of fund managers (Fama, 1972, Kacperczyk et al, 2014.…”

Learning about Mutual Fund Managers

“…A manager's excess returns over the benchmark, before fees, for his Funds 1 and 2 at time t , are given by where s, funds' expected excess returns, are partly fund‐specific and partly manager‐specific, that is, a manager can generate excess returns, but not necessarily by the same amount in the two funds (ψ 1 generally does not equal ψ 2 ) . While we do not model the source of these excess returns, we believe that managers could possess stock‐picking and market‐timing ability (Berk and Green (), Mamaysky, Spiegel, and Zhang (), Kacperczyk, van Nieuwerburgh, and Veldkamp ()) and that part of the two funds' excess returns can be attributed to the manager. Throughout the paper, we define the unobserved ability to generate expected (gross) returns in excess of a passive benchmark in the two funds as manager skill.…”