Fund Timing of Stock Misvaluation

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Summary

This study examines whether U.S. equity mutual fund managers adjust market exposure when stock misvaluation is unusually high. It measures common misvaluation with a financing-based factor that buys repurchasing firms and sells issuing firms, then removes variation associated with macroeconomic conditions. A timing regression relates fund returns and market exposure to deviations in this measure from its trailing average.

Portfolio and individual-fund analyses report positive timing among most fund categories: managers tend to raise market exposure when systematic undervaluation is higher. The pattern persists after excluding major crisis periods and controlling for market, volatility, liquidity, sentiment timing, and misvaluation risk. Bootstrap tests suggest that strong individual-fund results are more consistent with skill than chance. Portfolios sorted on estimated timing show a performance spread of roughly three percent a year, and timing is more associated with smaller, younger, higher-turnover funds.

The evidence is historical and focuses on U.S. active equity mutual funds from 1980 to 2016. It does not establish that the signal is directly tradable or will persist out of sample; the source also notes that income funds show little significant timing.

Key ideas

The study measures common misvaluation with a repurchase-minus-issuance factor, adjusted for macroeconomic influences.
A timing coefficient tests whether funds change market exposure as misvaluation moves away from its trailing average.
Most fund categories show greater market exposure during periods of stronger systematic undervaluation.
Results remain significant after crisis exclusions and controls for other forms of timing and misvaluation risk.
Bootstrap evidence and sorted-portfolio returns support skill and economic value, though the analysis is historical and U.S.-specific.

Mutual Fund Timing of Common Stock Misvaluation

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