Time‐Varying Fund Manager Skill

TLDR

The study proposes a new definition of fund manager skill as the general cognitive ability to pick stocks or time the market. The authors operationalize this skill by combining stock picking during booms with market timing during recessions. They find that managers who excel at stock picking in expansions also excel at market timing in recessions, outperforming peers and passive benchmarks, and that a new measure weighting timing in recessions and picking in booms is more persistent and predictive of performance.

Abstract

ABSTRACT We propose a new definition of skill as general cognitive ability to pick stocks or time the market. We find evidence for stock picking in booms and market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new measure of managerial ability that weighs a fund's market timing more in recessions and stock picking more in booms. The measure displays more persistence than either market timing or stock picking alone and predicts fund performance.