Abstract
This paper examines whether fund managers can adjust the exposure of portfolio to time market sentiment, thus expanding the new dimension of the study of mutual fund managers’ timing ability. Using the data of Chinese open-end equity funds from January 2010 to December 2019, based on the CICSI sentiment index developed by Yi and Mao (2009), we find strong evidence that Chinese mutual fund managers have sentiment ability during the sample period. In addition, the funds with positive sentiment timing ability outperforms those without such by 2.20% per year, and the longer the fund survives, the more likely for it to have sentiment timing ability. Our findings remain robust even after controlling the impact of bull and bear market on China’s A-share market in 2015, market timing, volatility timing and liquidity timing, and after using three new sentiment indicators to verify the finding, three indicators being the net buying amount of northward capital, the net buying amount of financing, and the net ratio of limit up.
Highlights
Whether mutual fund managers have the timing ability is an old and unresolved issue
Our mutual fund data comes from RESSET financial research dataset (RESSET), and the rest comes from the China Stock Market & Accounting Research (CSMAR)
In order to test the ability of sentiment timing ability, we follow the traditional literature on timing, using a first-order Taylor series expansion to express the market Beta as a linear function of market sentiment that exceeds the average of its time series: βmp = β0mp + γmp(Smt − Sm )
Summary
Whether mutual fund managers have the timing ability is an old and unresolved issue. By checking whether fund managers can adjust their portfolio exposure based on their predictions of market returns, Treynor and Mazuy (1966) creatively developed a model to measure the market timing ability. The irrational preference and investment characteristics of individual investors have led to predictability in China’s stock market (Yi and He, 2016) Such a special investment structure and investment sentiment may enable fund managers in China to commit arbitrage more . Yi and Mao (2009) think there is some problem because of the single measurement indicator and the impure measurement results by using this method According to this idea, they built a CICSI index (Chinese stock market investor sentiment composite index), which includes six indicators, such as fund discount rate, turnover rate, IPO quantity, IPO first-day return, consumer confidence index and the number of accounts opened by new investors.
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