If professional money managers can’t effectively time the market, why would anyone else think they can?
That’s an obvious question that arises from a new paper that examines the asset class timing ability of a large sample of multi-asset class funds over the period 2000 to 2012.
The paper, titled “Multi-Asset Class Mutual Funds: Can They Time the Market? Evidence from the US, UK and Canada,” was produced by Andrew Clare of the University London’s Cass Business School, along with others.
As the authors note, the interest in such funds continues to grow as investors embrace diversification following two particularly bad experiences with equity-concentrated portfolios since 2000 including the technology stock crash around 2001 and latterly the financial crisis from 2008.
“Furthermore, as more investors must now take responsibility for their own pension savings in the form of defined contribution savings vehicles, multi-asset class funds are seen as an important ingredient in any practical solution,” they write. “Individual investors could themselves combine a range of single asset class mutual funds that together comprise a multi-asset class holding. However, it is reasonable to assume that in choosing a multi-asset class mutual fund investors want not just the low cost efficient diversification benefits but also the asset allocation skills of the fund manager.”
That is, the multi-asset class fund investor is also paying for the manager’s ability to time asset class return movements. An important question, therefore, is whether the managers of such funds possess skill in timing the relative movements of asset classes.
“Of course the skills of the multi-asset class fund manager will comprise both the selection of strategic long term asset class weights as well as tactical asset class timing and security selection abilities,” they continue. “In the case of most funds it is impossible to know these strategic weights without detailed interrogation of the trustees and their advisers. The tactical asset allocation contribution is defined as the difference between the strategic weights and realized allocation weights with the asset class timing component being the over or under-weighting of asset classes relative to the long run strategic target weights.
So what, then, is the answer?
“Our results indicate overall that timing skill is rare and is found among a small minority of funds. This conclusion is supported by both the returns-based approach and the holdings-based tests.”
See Also:
- 401(k) Participants Flock to Multi-Asset Class Investment Approach
- Top 401(k) Target Date Fund Families
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
