Content area
Full Text
Selected papers from the Annual Meeting of the Southern Finance Association in 2008
Edited by Susana Yu and Richard Lord
1. Introduction
We examine the market-timing ability and determinants of performance of sector funds over the business cycle for the period 1990-2005. Market-timing measures the ability of a manager to change the portfolio allocations between stock and cash in order to take advantage of market movements. The majority of the research on diversified mutual funds (for example [36] Treynor and Mazuy, 1966; Henriksson and Merton, 1981; [1] Becker et al. , 1999; [14] Graham and Harvey, 1996; [22] Jiang, 2003) shows that while some fund managers are able to earn positive alphas, they show negative or no market-timing abilities. While a number of studies have examined market timing in large diversified mutual funds, other segments of the mutual fund industry where fund managers specialize in certain fund categories, such as small cap funds, bond funds or sector funds, have received scant or no attention with regard to market timing.
Sector funds are actively managed equity funds that, although diversified within their own sector, are not well-diversified in the conventional sense because of their narrow industry focus. Since these fund managers invest in only one sector of the economy, not an array of different industries like the typical diversified fund, the maintained hypothesis is that sector fund managers know their sector and the stocks in it better than other fund managers who invest in different types of industries. Furthermore, as these fund managers have intimate knowledge of their sector, they also know how their particular sector responds to changes in the business cycle, i.e. managers know whether the sector leads or lags the market in upturns and downturns, and whether the sector is more or less volatile than the market and/or their benchmarks. Thus, it is very plausible that sector fund managers could detect good stocks that are undervalued and/or bad stocks that are overvalued and, therefore, be able to positively time the market to earn superior returns for their investors. If managers are able to use their informational advantages, they should be able to reallocate and rebalance the portfolio to quickly change the beta loadings in response to their inside information.
To date, the only...