Selection, Timing and Total Performance of Equity Funds: Wasting Time Measuring Timing

Abstract

Existing literature states that timing activities bias traditional mutual fund performance measures like Jensen’s alpha. In contrast, we show analytically and via a comprehensive empirical analysis that measures of total performance are virtually identical for Jensen’s alpha and popular unconditional timing models. Furthermore, we find similar relations for conditional timing measures. Finally, we show that all measures result in very similar statistical significance. Since measured selection and timing performance yield no informational benefit with respect to total performance, we conclude that Jensen’s alpha is an accurate total performance measure even in the presence of significant timing ability.