Multi-asset class mutual funds: Can they time the market? Evidence from the US, UK and Canada

The importance of asset allocation decisions in wealth management is well established. However, given its importance it is perhaps surprising that so little attention has been paid to the question of whether professional fund managers are skilful at timing market movement across asset classes over time. The timing literature has tended to concentrate on the timing skill of single asset class funds. Using data on US, UK and Canadian multi-asset class funds, we apply two alternative methodologies to identify the asset class timing abilities of managers. Overall, whether we apply a returns-based method or a holdings-based testing approach, we find evidence of only a tiny minority of funds with asset class timing ability.

We examine equity market timing relative to the asset classes of government bonds and corporate bonds. The dependent variable is the change in the weight held in equity while we use asset class relative return as the independent variables as follows:%ΔACe,t=α+β1ReRbgt+1+β2ReRbct+1+εe,tA positive value for β1 and/or β2 indicates that a manager increases their allocation to equities ahead of a time when equities outperform government bonds and/or corporate bonds. The chart shows the percentage of funds displaying statistically significant positive timing ability in the three mutual fund markets. The blue bars represent the proportion of managers in each market that display positive timing abilities with regard to the equity and government bond market, while the red bars show the same phenomenon, but with regard to the equity and corporate bond markets.Figure optionsDownload as PowerPoint slide