Sector Betting or Sector Timing?

Previous research demonstrates that actively managed mutual funds exhibit negative market timing abilities. However, few studies have investigated the sector timing abilities of these fund managers. By implementing a multi-factor model based on Sharpe (1992), I derive a time series of mutual fund sector risk exposure coefficients which are demonstrated to be good proxies for actual fund exposures to the eight sectors examined in this study. Based on these sector risk exposures, sector timing measures are derived and used to explore whether fund managers in general, or certain sub-groups of fund managers in particular, exhibit successful sector timing abilities. My sample covers 485 randomly selected mutual funds listed on Datastream for the period from April, 1997 to July, 2002. I conclude that mutual funds as a whole exhibit some evidence of negative sector timing abilities. However, particular groups of funds, such as aggressive growth funds, appear to possess better sector timing abilities than other types of funds, and this pattern is more manifest after controlling for market downturn conditions.

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