Alternative Model to Evaluate Selectivity and Timing Performance of Mutual Fund Managers: Theory and Evidence

This chapter empirically examines the selectivity, market timing, and overall performance of equity funds in the United States from January 1990 to September 2005. We first used the Sharpe, Treynor, and Jensen measures to evaluate the selectivity performance of mutual fund managers. In addition, we also used the Treynor-Mazuy, Henriksson-Merton, and Lee-Rahman models to evaluate the selectivity and timing performance of mutual fund managers. Based on these measures and models, we found that about one-third of funds had significant positive selectivity ability. In addition, we also found that some funds have timing ability for the mutual fund managers. Nevertheless, without considering the transaction costs and taxes, the actual investment for most mutual funds compared to a passive investment strategy still appears to take the lead.