Market Timing II
When I started in this business all the wisdom said you could never time the market. That may have had some validity 20 some years ago (in the era of the dinosaurs as my kids say) but in an era of 1/8th to 1/4 point spreads on stocks and when buying or selling 100 shares of stock could cost close to 100 dollars in commissions. In today's world, particularly where money flows can be measured this is less and less true. Now I don't believe that one can ever precisely call a top or bottom in the markets. However, studying money flows can add the element of probability to trying to understand where we are in markets and then one can develop the appropriate tactics to that situation. The Wall Street Journal took on this subject almost as a rebuttal last Thursday. While the author seems to be saying that this might not work so well for mutual funds, note that this is not necessarily the conclusion of study out of New York University's Stern School of Business {mentioned Friday} on market timing. Here is the WSJ excerpted story with links. Highlights mine.
Mutual Funds Time the Market.
By Eleanor Laise.
In an effort to lure back investors still wary of stocks, more mutual-fund managers are playing a risky game: timing the market. Many of these funds promote their ability to avoid big losses by trading in and out of the stock market at just the right time. Some are labeled "tactical allocation" or "dynamic" funds. But even funds that don't openly tout such strategies are moving in and out of big cash stakes, betting that they can outsmart the volatile market.......
{Certain funds}......have leeway to make swings between cash and other investments. But funds attempting to time the market often deliver erratic performance, charge high fees and rack up big trading costs. These funds are something of a bright spot for the fund industry, which has seen billions flow into bond funds but little cash go to more-profitable stock funds. Investors put $4.1 billion into world-allocation funds (Morningstar's category that tracks the most-flexible funds) in the first nine months of this year, while adding only $4.3 billion to stock funds and plowing $213 billion into taxable bond funds.
Some of these funds have beaten the market in recent years......But they can also give investors whiplash.....Fund companies say investors spooked by the recent market turmoil are demanding more-flexible products. Many investors have been frustrated "with investment products that were not able to react to the environment that we just went through," says Joel Sauber, head of U.S. products at Legg Mason......
A study from New York University's Stern School of Business suggests market-timing can work for some mutual-fund managers. The best stock-pickers during economic expansions also show some market-timing ability in recessions, the study found.
But academic research raises doubts that the typical fund manager can successfully time the market over the long haul. Anders Ekholm, adjunct professor at Hanken School of Economics in Helsinki, recently analyzed more than 4,000 U.S. stock funds' returns between 2000 and 2007. Managers helped their performance through stock-picking, he found, but hurt their returns by market-timing.
There are a couple of reasons why the deck is stacked against market-timers, Mr. Ekholm says. Market-timing requires more trading, and transaction costs hurt performance. What's more, while a manager may relatively easily dig up some unique information that gives him an edge in selecting an individual stock, it's difficult to get such superior information about the overall market.
Though some fund companies are promoting their new tactical-allocation funds as core holdings, analysts are skeptical. If the manager makes a wrong call, like plowing into cash before a market rally, "that could really hurt the investor," says Karin Anderson, mutual-fund analyst at Morningstar.
Some managers moving in and out of the market rely on macroeconomic views. Others are simply bottom-up stock-pickers who hold lots of cash when they can't find other opportunities. Then there's John Hancock Technical Opportunities Fund, which is guided purely by technical analysis, examining patterns in market data.
Given these managers' long leash, it can be tough for investors to keep track of what they're doing...... Even some funds with narrower mandates are shifting in and out of big cash stakes.....Funds dodging in and out of the market also tend to be quite costly.
{Certain funds}......have leeway to make swings between cash and other investments. But funds attempting to time the market often deliver erratic performance, charge high fees and rack up big trading costs. These funds are something of a bright spot for the fund industry, which has seen billions flow into bond funds but little cash go to more-profitable stock funds. Investors put $4.1 billion into world-allocation funds (Morningstar's category that tracks the most-flexible funds) in the first nine months of this year, while adding only $4.3 billion to stock funds and plowing $213 billion into taxable bond funds.
Some of these funds have beaten the market in recent years......But they can also give investors whiplash.....Fund companies say investors spooked by the recent market turmoil are demanding more-flexible products. Many investors have been frustrated "with investment products that were not able to react to the environment that we just went through," says Joel Sauber, head of U.S. products at Legg Mason......
A study from New York University's Stern School of Business suggests market-timing can work for some mutual-fund managers. The best stock-pickers during economic expansions also show some market-timing ability in recessions, the study found.
But academic research raises doubts that the typical fund manager can successfully time the market over the long haul. Anders Ekholm, adjunct professor at Hanken School of Economics in Helsinki, recently analyzed more than 4,000 U.S. stock funds' returns between 2000 and 2007. Managers helped their performance through stock-picking, he found, but hurt their returns by market-timing.
There are a couple of reasons why the deck is stacked against market-timers, Mr. Ekholm says. Market-timing requires more trading, and transaction costs hurt performance. What's more, while a manager may relatively easily dig up some unique information that gives him an edge in selecting an individual stock, it's difficult to get such superior information about the overall market.
Though some fund companies are promoting their new tactical-allocation funds as core holdings, analysts are skeptical. If the manager makes a wrong call, like plowing into cash before a market rally, "that could really hurt the investor," says Karin Anderson, mutual-fund analyst at Morningstar.
Some managers moving in and out of the market rely on macroeconomic views. Others are simply bottom-up stock-pickers who hold lots of cash when they can't find other opportunities. Then there's John Hancock Technical Opportunities Fund, which is guided purely by technical analysis, examining patterns in market data.
Given these managers' long leash, it can be tough for investors to keep track of what they're doing...... Even some funds with narrower mandates are shifting in and out of big cash stakes.....Funds dodging in and out of the market also tend to be quite costly.
No postions in any funds mentioned.
posted by CR English at 6:48 AM
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