Abstract
An important source of performance for active managers is industry weighting, yet this is neglected by the performance evaluation literature. Most market timing studies are conducted at a broad level, assessing exposure to equities as an asset class. This paper investigates the ability of US equity fund managers to time industry performance. The results indicate that, as a group, the funds exhibit no timing skills, with positive timing as frequent as negative timing. There is a subset of funds however, that appear to have strong forecasting abilities, correctly timing industries that are otherwise poorly timed by most fund managers. General timing ability is weakest in the Finance, Cyclical Services and Information Technology industries, while Consumer Goods industries show the best timing results.
Highlights
Market timing relies on accurate forecasting of the relative performance of asset classes and adjusting asset allocation to exploit the prediction
A very important fund management activity is a strategy of adjusting industry exposure based on outlook for industry conditions, yet performance evaluation in the academic literature has ignored this
We find that negative industry timing occurs as frequently and positive industry timing at a five-percent significance level, where the thirty-six percent of funds is split approximately evenly
Summary
“Some favorable industry positioning played a role in the fund's success (over the period). As illustrated by the quote of the manager of the largest actively managed funds in the United States, Fidelity Magellan, industry exposure is an important factor. This observation is typical of comments made by fund managers in discussing performance and assessing strategy. After underweighting energy versus the index during the first half of the period, I increased the fund's exposure to a significant overweighting during the summer months. Another change I made was raising the fund's weighting in reinsurance stocks.
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