Market and Style Timing: German Equity and Bond Funds

Date01 September 2016
Published date01 September 2016
Market and Style Timing: German
Equity and Bond Funds
Keith Cuthbertson, Simon Hayley and Dirk Nitzsche
Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ
We apply parametric and non-parametric estimates to test market and style timing
ability of individual German equity and bond mutual funds using a sample of over
500 equity and 350 bond funds, over the period 19902009. For equity funds, both
approaches indicate no successful market timers in the 19901999 or 20002009
periods, but in 20002009 the non-parametric approach gives fewer unsuccessful
market timers than the parametric approach. There is evidence of successful style
timing using the parametric approach, and unsuccessful style timing, particularly
in the 20002009 period. There is evidence of positive and negative bond timing in
the 20002009 period.
Keywords: mutual funds performance, market timing
JEL classification: C14, G11
1. Introduction
After the US, UK, Japan and France, Germany is the 5
largest asset management centre
in the world. Mutual fund investments in Germany account for around US$ 335 billion
under management. With ongoing political and nancial restructuring it is expected that
individuals will have to become increasingly responsible for future long-term pension
savings. Therefore it is expected that the mutual fund industry will grow rapidly over the
medium term as reforms to private pension provision place greater emphasis on dened
contribution pensions (i.e., Riester Rente) and reforms result in a less generous state
pension. As in other countries such as the US and UK, mutual fund assets are
predominantly held in active funds this paper examines whether active German equity
and bond funds engage in successful market and style timing.
Mutual fund performanceis usually discussed in terms of selectivity(alpha) and timing
and is analysed using either returns data or (where available) portfolio holdings data.
Returns-based studies may be further subdivided into parametric and non-parametric
We thank two anonymous referees who made numerous suggestions to improve the paper.
We also thank David Barr, Andrew Clare, Anil Keswani, Ian Marsh, Michael Moore,
Dylan Thomas, Lorenzo Trapani and seminar participants at the Western Economic
Association, San Francisco 2012, for discussion and comments.
European Financial Management, Vol. 22, No. 4, 2016, 667696
doi: 10.1111/eufm.12080
© 2015 John Wiley & Sons, Ltd.
approaches. To model timing effects in the parametric approach, a factor model is
augmented with additionalnon-linear functions of the factors (Treynor and Mazuy,1966;
Henriksson and Merton, 1981). Parametric models of timing may be unconditional or
conditional on publicly available information, which allows for time-varying alphas and
factor loadings (Ferson and Schadt, 1996; Christopherson, Ferson and Glassman, 1998).
The parametric approach measures both the response to the timing signal and the
strength of that response (in terms of the size of the change in beta).The non-parametric
returns- based approach provides a measure of the quality of the managers forecast,
independent of the aggressiveness of the response due to changing factor loadings.
In this study we use a large (survivorship-bias free) sample of over 500 equity and 350
bond funds, over the last 20 years (19902009). The key contributions of the paper are as
follows. First we use both parametric and non-parametric approaches (Jiang, 2003) and
test for both unconditional and conditional market timing this to our knowledge has not
been done for German funds and provides complementary evidence to the literature on
US and UK data which itself is mainly based on parametric approaches
(Treynor-Mazuy (TM), 1966; Henriksson-Merton (HM), 1981; Ferson and Schadt,
1996; Christopherson et al., 1998). Second, for the rst time, we examine style timing for
German equity funds that is, do managers forecast the future path of small fund returns
relative to large fund returns (size timing) or returns on high book-to-market relative to
low book-to-market rms (growth timing) and successfully alter their weighting on
these factors, to enhance future fund returns.
Third, we examine the timing skills of
German equity funds with domestic, European and Global mandates thus providing
evidence on the home-biasissue (Coval and Moskowitz, 1999; Hong et al., 2005).
Finally, we examine the market timing ability of bond funds using parametric and non-
parametric models to the best of our knowledge the latter has not previously been
attempted for bond funds and certainly not for German bond funds.
Given the paucity of
empirical work on German mutual funds this substantially enhances our knowledge of
the performance of a large and growing industry in both domestic and foreign markets.
The key resultsof the paper are as follows. Using a non-parametric measurewe nd both
fewer successful and fewer unsuccessful equity market timers than for the parametric
method but overall, both methods give few successful markettimers and a larger number
of funds that are negative market timers. On style timing both approaches indicate that a
substantial number of German equity funds with European or Global mandates are
unsuccessful timers of sizeand growthfactors in the later period 20002009. This
suggests that the rapid growth in these international equity funds may have resulted in
managers having poor ability in forecasting markets with which they are less familiar.
Overall our non-parametric results suggest that there are few if any equity funds which
are successful market or style timers but there is stronger evidence of unsuccessful
market and style timers particularly for European and Global mandates. For bond
Studies of timing that use holdings data avoid some of the potential biases in parametric
factor timing models due to interim trading and passive timing (Jiang et al., 2007; Elton et al.,
2012; Huang and Wang, 2014).
Although we refer to fund managers it is the performance of funds that we examine.
The potential role for conditioning information in the predictability of German aggregate
bond and stock indexes has been established by Hyde and Kappel (2010) although no
specic combination of variables dominates over different sample periods.
© 2015 John Wiley & Sons, Ltd.
668 Keith Cuthbertson, Simon Hayley and Dirk Nitzsche

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