Style analysis and dominant index timing: an application to Australian multi-sector managed funds

Abstract

Using a returns-based style analysis approach, we develop a dominant timing indicator to measure each fund's ability to take advantage of movements in their dominant passive index. We apply this to a sample of Australian multi-sector funds over the period 1990 to 2005. We find evidence that the dominant timing metric presents a more positive picture of fund timing ability in comparison to traditional timing measures; however, the majority of funds are still unable to time their dominant index effectively.

Notes

¹ Our inability to find any conclusive timing ability is consistent with prior studies (see, e.g. Philippas and Tsionias, 2002).

² When indices with high correlations are used, the optimization algorithm has difficulty in determining the coefficients, and therefore the results can be less precise (Dor et al., 2003; Patterin et al., 2004).

³ As an alternative to the rolling window technique, Swinkels and Van Der Sluis (2006) recommend and employ the Kalman filter procedure.

⁴ Our analysis is susceptible to survivorship bias. However, using a similar sample to ours, Holmes and Faff (2004) report that survivorship does not have a major impact on the performance assessment of this type of Australian funds.

⁵ The reader should take note that these graphs are provided as a purely descriptive means of illustrating general patterns over time for selected funds.