Market timing trumps buy-and-hold strategies during market swings, says NYU study

Nov 10, 2009 @ 1:44 pm

By David Hoffman

The fund managers who invest based on macroeconomic trends — and are willing to adjust their portfolios as those trends change — are the managers most likely to add value for investors, according to a study released today by the New York University Stern School of Business.

“The current recession has left many investors with lost confidence in financial markets and, more narrowly, in the people managing their money,” Marcin Kacperczyk, a finance professor at the school and one of the study’s three authors, said in a statement.

“Given that we are currently in a recession, our work suggests that individuals should be looking for a different type of investment manager; one that invests based on macro information.”

By analyzing data from January 1980 through December 2005, the study identified the top 25% of actively managed equity mutual funds based on their ability to select stocks during expansionary economic periods. The report noted that this same group showed proficiency at market timing during recessions as well.

This group outperformed other funds in both risk-adjusted terms and after expenses, according to the study.

The study’s findings, however, seem hard to swallow, said Russel Kinnel, director of mutual fund research at Morningstar Inc.

The 1980s were littered with funds that blew up because managers tried to follow macroeconomic trends, he said.

“It hasn’t worked very well,” Mr. Kinnel said.

Mr. Kacperczyk had not returned calls for additional comment.

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