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Portfolio returns and manager activity: How to decompose tracking error into security selection and market timing

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  • Ekholm, Anders G.

Abstract

We develop a new method for detecting portfolio manager activity. Our method relies exclusively on portfolio returns and, consequently, avoids the pitfalls associated with disclosed portfolio holdings. We investigate the link between activity and performance of actively managed U.S. equity funds from 2000 to 2007 and document robust evidence that future performance is positively related to past stock picking and negatively associated with past market timing. Finally, we find that portfolio manager activity is highly persistent over time, which supports the conclusion that stock picking increases performance while market timing decreases performance.

Suggested Citation

  • Ekholm, Anders G., 2012. "Portfolio returns and manager activity: How to decompose tracking error into security selection and market timing," Journal of Empirical Finance, Elsevier, vol. 19(3), pages 349-358.
    • Handle: RePEc:eee:empfin:v:19:y:2012:i:3:p:349-358
    DOI: 10.1016/j.jempfin.2012.02.002
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    References listed on IDEAS

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    Cited by:

    1. Ruzita Abdul Rahim & Ling Pick Soon & Rasidah Mohd Rashid, 2019. "Performance of Local Versus International Focus Malaysian-based Mutual Funds," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 15(2), pages 53-75.
    2. Harry Flam & Roine Vestman, 2017. "Swedish Equity Mutual Funds 1993-2013: Performance, Persistence and Presence of Skill," CESifo Working Paper Series 6713, CESifo.

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    More about this item

    Keywords

    Security selection; Stock picking; Market timing; Performance; Tracking error;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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