What Skills Do Star Fund Managers Possess?

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. We use novel factor 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 beta estimates. To exclude the possibility that the observed timing ability is due to good luck, synthetic funds are examined as in Busse (1999). Our results indicate that growth-oriented fund managers who earn abnormal returns demonstrate substantial growth timing skill, i.e. successful timing activity across the growth/value spectrum. 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 big 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, thereby avoiding a common misidentification problem.