We decompose the conditional expected mutual fund return in five parts. Two parts, selectivity and expert market timing, can be attributed to manager skill, and three to variation in market exposure that can be achieved by private investors as well. The dynamic model that we use to estimate the relative importance of the components in the decomposition is a generalization of the performance evaluation models by Lockwood and Kadiyala (1988) and Ferson and Schadt (1996). We find that the restrictions imposed in existing models may lead to different inferences about manager selectivity and timing skill. The results from our sample of 78 asset allocation mutual funds indicate that several funds exhibit significant expert market timing, but for most funds variation in market exposures does not yield any economically significant return. Funds with high turnover and expense ratios are associated with managers with better skills.

market timing, mutual funds, pensioenfondsen, performance evaluation
Pension Funds; Other Private Financial Institutions (jel G23), Corporate Finance and Governance (jel G3), Business Administration and Business Economics; Marketing; Accounting (jel M), Accounting (jel M41)
hdl.handle.net/1765/978
ERIM Report Series Research in Management
Erasmus Research Institute of Management

Swinkels, L.A.P, van der Sluis, P.J, & Verbeek, M.J.C.M. (2003). Market timing: A decomposition of mutual fund returns (No. ERS-2003-074-F&A). ERIM Report Series Research in Management. Retrieved from http://hdl.handle.net/1765/978