Market timing ability of global fund managers

Journal of International Money and Finance 25 (2006) 1029e1050
www.elsevier.com/locate/jimf
Market timing by global fund managers

Debra A. Glassman a, Leigh A. Riddick b,*
a
University of Washington Business School, Box 353200, Seattle, WA 98195, USA
b
Kogod School of Business, American University, 4400 Massachusetts Avenue, N.W.,
Washington, DC 20016-8044, USA
Abstract
We analyze the market timing ability of US global equity fund managers in the late 1980s and early
1990s, before hedge funds became prominent in global investing. We examine both portfolio weights and
returns to distinguish between world market timing (movements of funds between all equity markets and
cash) and national market timing (movements out of one country’s equity market into one or more other
countries’ equities). We find no evidence of world market timing, but do find evidence of national market
timing. Earlier papers examining multi-country fund management find very little evidence of market tim-
ing ability, but they do not explicitly consider the difference in world and national timing. Our results sug-
gest that it may be important to capture the distinction between the two types of global timing activity. Our
methodology and results may also be pertinent to domestic papers that examine simultaneous movements
between asset classes and cash.
Ó 2006 Elsevier Ltd. All rights reserved.
JEL classification: G11 Portfolio Choice
Keywords: Market timing; Asset allocation; Portfolio performance; International portfolio performance
1. Introduction
This paper provides evidence on market timing by managers of US global investment funds.
An important characteristic of our analysis is that we distinguish between two types of global
market timing: world market timing, i.e., a general movement into or out of cash relative to all
* Corresponding author. Tel.: þ1 202 885 1944; fax: þ1 202 885 1946.
E-mail address: riddick@american.edu (L.A. Riddick).
0261-5606/$ - see front matter Ó 2006 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jimonfin.2006.08.007
1030 D.A. Glassman, L.A. Riddick / Journal of International Money and Finance 25 (2006) 1029e1050
countries’ equity assets; and national market timing, i.e., the reallocation of funds among var-
ious countries’ equity markets based on expectations about relative market strength. We focus
on major market moves in the period 1985e1990 because hedge funds were not yet an impor-
tant player in the market. We assess timing by searching for patterns in both equity portfolio
weights and equity portfolio returns for a sample of US global fund managers. We find no
evidence of world timing but we do find evidence for national timing in our sample.
It is significant that we find evidence of market timing ability when the great majority of
both domestic and international portfolio performance papers have found little support for
any timing ability, despite examining many types of funds with many different techniques. Re-
cent examples include Becker et al. (1999), who study US mutual funds; Fletcher (1995) and
Blake et al. (1999), who study UK pension fund data; Fung et al. (2002), who study interna-
tional hedge funds; and Kao et al. (1998), who study international mutual funds.1 Our results
suggest that considering both world and national timing measures can capture timing ability
that may otherwise go undetected. The intuition for this interpretation is that a test that explic-
itly distinguishes between the two can capture the fact that global managers are simultaneously
moving money from country to country while considering cash as a safe alternative.
Examining weights allows us to both separate movements of funds between national equity
markets from movements out of all countries into cash, and to easily consider relative move-
ments between countries. Using weights for statistical tests of portfolio positions also requires
no assumptions about either the underlying model that drives asset returns or related benchmark
portfolios. Since results in timing studies can be very sensitive to both (see, e.g., Grinblatt and
Titman, 1993), this is a strength of the approach.2 However, any portfolio analysis without
a benchmark portfolio for comparison is subject to questions about its ability to differentiate
between luck and skill. Since it is not possible to address both benchmark sensitivity and skill
with one approach, we also examine portfolio returns for a sample of US global mutual fund
managers for the same period, using a benchmark model. In this second analysis we measure
timing ability by extending the standard single world index timing model (our world timing
scenario) to accommodate movements between countries (our national timing scenario).3
We examine all months in our sample in both the national and world timing analyses, but we
are most interested in examining periods around the large market moves during our sample pe-
riod: the October crash of 1987, the October crash of 1989, and the drop in Japan that began in
January 1990. While we find evidence of market timing in other periods, our strongest evidence
supports the hypothesis that managers moved out of the Japanese market and into other coun-
tries just prior to Japan’s dramatic drop in early 1990. However, the managers did not make
1
One recent exception is Bollen and Busse (2001) who find some evidence of daily timing ability when monthly
timing ability is negligible during the same period. Bange et al. (2004) also find some evidence of strategic asset allo-
cation skill with quarterly data prior to the 1997 crash, but not after.
2
While Grinblatt and Titman (1993) also provide a benchmark-free analysis, our research question and methodology
necessarily differ. They examine the average covariance between returns and portfolio weights over an entire sample
period, to examine average performance. We examine individual asset weights, alone, but for specific points in
a time series, and thus require a different methodology than that in Grinblatt and Titman.
3
A number of prior studies use a single world benchmark to assess timing ability, but do not consider movements
between countries (see, e.g., Eun et al., 1991; or more recently Kao et al., 1998; and Fung et al., 2002). While, as
we will show, single index models can capture world market timing ability, they do not provide a good benchmark un-
less purchasing power parity (PPP) holds, and it is well established that PPP does not hold (see Glassman and Riddick,
1996).
D.A. Glassman, L.A. Riddick / Journal of International Money and Finance 25 (2006) 1029e1050 1031
strategic moves prior to the worldwide 1987 and 1989 market crashes that affected most mar-
kets around the world.
Recent work has raised issues about the usefulness of international diversification because of
increases in correlation, both generally over time and during extreme market moves such as
those we examine here. For example, Longin and Solnik (1995, 2001) show that conditional
correlations have risen over the past 30 years, and that correlations rise during periods of
high volatility, particularly in bear markets. These documented increases in correlations are
widely believed to have decreased diversification opportunities in international investing, which
makes it more difficult for managers to successfully engage in timing activities. To address this
issue, we provide evidence that significant diversification opportunities remain in our sample
period.
The remainder of the paper is organized as follows. Section 2 covers the analysis with the
pension fund portfolio weight data and addresses the correlation issue. Section 3 presents the
analysis of the global mutual fund returns. Section 4 concludes.
2. Analyses of portfolio weight data for pension fund managers
We begin by examining the month-to-month changes in portfolio weights for a sample of

pension fund managers. In particular, we are interested in identifying any patterns of national
or world market timing around the three major market moves during the 1985e1990 sample:
the October 1987 worldwide stock market crash, the smaller October 1989 crash, and the dra-
matic drop in the Japanese market that began in January 1990. We begin by describing our data
and the major market moves in the sample period. We then describe the logratio methodology,
correlation issues, and close with a report of our results.
2.1. Data
Data on individual portfolio weights are rarely available for research outside an investment
house.4 However, we have been fortunate to obtain data on portfolio weights for roughly $40
billion in US pension fund monies tracked by the Frank Russell Company, a major pension fund
management firm. The data are for end-of-month aggregate positions in each national market,
and the sample period is 1985:1e1990:12, prior to the time hedge funds became major players
in this market.5 During that time, from 21 to 70 individual portfolios were formed by portfolio
managers who had been given a ‘global brief’ by their pension fund clients, which means that
they included international as well as US assets in their asset menu. Managers had no restric-
tions on amounts of money per country or on how to allocate funds within countries. Our
4
No statistical agency currently reports the aggregate holdings of a specific country’s investors in the assets of other
countries on a regular basis. In the mid to late 1990s the US Department of the Treasury surveyed US investment houses
to construct a point estimate of holdings, the first since the close of World War II (and has also begun collecting data on
foreigners’ ownership of US stocks), and two updates are available. Most authors proxy the international distribution of
equity holdings by cumulating country-specific flow data, as in French and Poterba (1991b), but recent evidence in
Warnock and Cleaver (2003) has shown such cumulative measures to be deficient.
5
Hedge funds have mandates that create incentives for fund managers that often lead to extreme positions. We wanted
to test our method on a more typical population. Additionally, since the majority of the work in this area looks at larger,
well-diversified funds, we wanted our sample to be comparable for valid comparisons (see Fung et al., 2002 for results
on hedge funds).
0.4 0.5
Germany, U.K., and Cash Weights
0.4
Japan and U.S. Weights

0.3
Germany
0.3 Japan
0.2 U.K.
0.2 U.S.
Cash
0.1
0.1
0 0
1:85 1:86 1:87 1:88 1:89 1:90
Month
Fig. 1. Actual portfolio weights.
country-specific portfolio weights are computed from the aggregate holdings of this set of
global managers.
There are two asset categories in the data set, equity and ‘other’, where the latter category
comprises investment in bonds and cash assets. In practice, the great majority of the holdings
are in the equity category. The ‘other’ category has virtually no bonds: it is viewed as a cash
asset or as cash held in transition from one equity market to another. The managers in our sam-
ple were not typically restricted by their institution in the amount of cash they could hold; any
restrictions were self-imposed. We therefore refer to the ‘other’ category as cash in this paper,
and view it as serving both an asset and a holding function.
For parsimony in presentation and sufficient degrees of freedom, our analysis will focus only
on equity investment in four national stock markets e Japan, Germany, the UK, and the US e
plus the cash category.6 Since we are limiting the list of assets we examine, it is important to
show why this limitation will not affect our results. As we discuss in the following subsection,
the logratio test has the appealing property that it is insensitive to the omission of assets from
the investor’s portfolio.
Fig. 1 presents the five series of monthly portfolio weights from the aggregate of our sample
of pension fund managers. (Note that identical symbols are used for any given country in all
figures in the paper.) We are particularly interested in the key months around October 1987
(8e22% drop for our sample countries), October 1989 (2e10% drop for our sample countries),
and early 1990 (the Japanese market dropped 6% in US dollar terms in January, 10% in Feb-
ruary, and 19% in March 1990). Over the sample period, the average change in each of the
country return indices was less than 2% per month, so these major market moves are notable.
Did portfolio managers anticipate these market moves and reallocate their portfolios accord-
ingly? Our priors are that the October 1987 and October 1989 crashes were unanticipated.7 In
6
We also repeated the analysis with four additional countries (Canada, France, Netherlands, Switzerland) and the
results were substantially the same.
7
For example, we note that the findings of Roll (1988) can be interpreted as an indication that there was little market
timing in anticipation of the October 1987 crash.
contrast, there is abundant anecdotal evidence that the fall-off in the Japanese market had been
long-awaited, at least by foreign investors. Shiller et al. (1991) document this with survey data.
Observers cited a variety of reasons to expect a market fall, including slow money supply
growth, higher interest rates in Japan, and an appreciating yen (The Economist, 10/21/89
and 11/11/89). Furthermore, Japanese P/E ratios, which reached levels above 60 in 1989,
were extraordinarily high by US standards. Even adjusting for Japanese cross share holding
and the important accounting differences between the two countries, the market appeared over-
valued (French and Poterba, 1991a; Ueda, 1990).
Our intuitions appear to be borne out in Fig. 1. First, there were large changes in portfolio
weights in the key time periods, but the changes seem to come after October 1987, and during
October 1989.8 Second, the October 1989 reallocation is dominated by a dramatic movement of
funds out of Japan.9,10 The reallocation out of Japan reduced the portfolio weight for Japan
from the 0.15e0.20 range, where it had been for most of the sample period, to less than
0.05 by the end of 1990. This qualitative evidence suggests that managers reacted to, but did
not anticipate, the worldwide crashes, and that they anticipated the Japanese market crash.
However, only statistical tests can tell us whether these portfolio reallocations were significant
in size; we turn now to those tests.
2.2. Methodology of the logratio test
We wish to compare asset weights in the periods before and after each major market move.
In this section we first briefly describe how the logratio test methodology is applied to testing
hypotheses about changes in portfolio weights. Then we present the test statistics for hypoth-
eses about changes in the overall portfolio and individual asset weights.
2.2.1. The logratio test

Testing hypotheses about portfolio weights is complicated by the fact that a portfolio’s
weights sum to 1. Standard multivariate tests cannot be applied to a set of asset weights because
this adding-up constraint makes the covariance matrix for the weights singular. The logratio test
overcomes these problems by the application of a logratio transformation, as proposed
8
We recognize that portfolio weight data may reflect passive as well as active portfolio adjustments. In the case of
international investment positions, there are two potential sources of passive changes: the weight may change because
the stock prices (market indexes) went up or down, or because the exchange rate changed (given that all portfolio hold-
ings are measured in dollar terms). While it is not possible to completely separate active from passive changes, the ab-
sence of high correlations between weight changes and contemporaneous returns or exchange rates makes us
comfortable in interpreting portfolio weight changes as evidence of deliberate (i.e., active) portfolio rebalancing. In ad-
dition, the change in the Japanese market in October 1989 is much smaller as a percent than the changes in the other
markets we examine. Thus, we are confident that the dramatic changes that we observe in the Japanese weights for our
sample of managers are due to more than mere loss of capital value for a passive position.
9
According to the Japanese Ministry of Finance, net stock purchases/sales by all foreign investors follow a similar,
although slightly less dramatic pattern. There were net stock sales of $183.5 million in August 1989, $291 million in
September, $4.15 billion in October, and $1.12 billion in November. However, December 1989 saw net purchases of
$6.28 billion, followed by net sales of $3.34 billion in January 1990 (source: Asian Wall Street Journal Weekly, various
issues).
10
The Japanese market continued to rise until it peaked on December 29, 1989, at 38915.87. Since foreign holdings
account for a very small percentage of Japanese equity (between 3.6% and 6% in the 1980e1987 period, according to
Takagi, 1989), it is not surprising that the withdrawal of foreign holdings was not sufficient to outweigh apparent
Japanese investor optimism.
generally by Aitchison (1986) and first applied to a portfolio setting by Glassman and Riddick
(1994).
Define Wit as the portfolio weight for asset ‘‘i’’ in month ‘‘t’’. Let there be M assets whose
weights sum to 1. Aitchison suggests applying the following data transformation. Choose one
asset, say the Mth asset, as a reference asset and define the ratios of the weights of all assets ‘‘i’’
to that of asset M. Applying a logistic transformation to each ratio, we have the ‘logratios’:

ln Wti =WtM ; i ¼ 1; .; M 1: ð1Þ
Since the logratios do not sum to 1 (unlike the original portfolio weights), the covariance matrix
of the set of M 1 logratios is nonsingular. Hence, standard multivariate statistical techniques
can be applied to test hypotheses about the set of portfolio weights.
Furthermore, the logratio test has the appealing property that it is insensitive to the omission
of assets from the investor’s portfolio. That is, we can test a hypothesis about a subset of asset
weights without observing the weights for other assets. This is because the ratio of two indi-
vidual asset weights remains constant even if the addition or subtraction of assets to the port-
folio alters the absolute size of the weights. For a detailed discussion of this property, see
Glassman and Riddick (1994).
Our hypotheses require us to do a series of before and after comparisons through time in
order to identify those months in which significant portfolio adjustments were made. In what
follows, we report comparisons of mean logratios for rolling 9-month windows. To make these
comparisons, we compute the asset logratios from the period leading up to each month t (those
logratios are denoted by Xt,ji, j ¼ t 8,.,t; i ¼ 1,.,M 1) and the asset logratios after time t
(denoted by Yt,ki, k ¼ t þ 1,.,t þ 9; i ¼ 1,.,M 1). Then we compute sample means for the
X’s and Y’s and compare them. Thus, the average logratios over the first 9 months of our sample
are compared to the averages over the next 9 months. Then we roll 1 month forward, and repeat
the calculation, until we have a series of 9-month comparisons. Our results are robust to other
window sizes.11
Assume that the sets of before and after portfolio weight logratios are drawn from normal
distributions as follows: Xt;j wNðmX;t ; SX;t Þ and Y t;k wNðmY;t ; SY;t Þ where Xt;j and Y t;k are
(M 1) 1 vectors of the portfolio logratios. Denote the means of the logratios for a sample
of n ¼ 9 months leading up to month t by the vector b uX;t :
" #0
X
t X
t
1 M1
b
uX;t ¼ ð1=9Þ Xt;j ; .; ð1=9Þ Xt;j : ð2Þ
j¼t8 j¼t8
Similarly, the means of the logratios for a sample of n ¼ 9 months following month t are
given as the elements in the vector b
uY;t :
" #0
X
tþ9 X
tþ9
1 M1
b
uY;t ¼ ð1=9Þ Yt;k ; .; ð1=9Þ Yt;k : ð3Þ
k¼tþ1 k¼tþ1
11
The results for window lengths of 8, 10, 11 and 12 months are available from the authors. We were not able to use
a shorter sample period than 8 months, in order to have a reasonable number of degrees of freedom for our tests.
In our analysis we first ask if investors generally engaged in significant rebalancing of their
portfolios prior to the event in question. To determine whether the entire portfolio after time t is
significantly different than the portfolio before time t, we will conduct F tests on the full vectors
b
uX;t and b
uY;t . Second, to determine whether any rebalancing was in the form of national or world
market timing, we will rely on t tests applied to individual elements of b uX;t and b
uY;t . We discuss
each test in turn.
2.2.2. Comparing entire portfolios: the F test

When we test whether there is significant rebalancing of the whole portfolio, we are testing
a hypothesis about the vector of before and after means for the (M 1) asset logratios. The for-
mal hypothesis is:
H0 : mX mY ¼ 0 ð4Þ
where we have dropped the subscript ‘‘t’’ for convenience.

We are testing for the equality of two vectors of means with unequal covariance matrices.12
The appropriate test statistic, which is a variant of Hotelling’s T2 test known as the multivariate
BehrenseFisher problem, is given by:
h 0 i.
uZ S1b
ðb uZ Þnðn M þ 1Þ ½ðn 1ÞðM 1Þ; ð5Þ
where Z is defined as the vector of differences between X and Y observations for each point in
time:
Z ¼X Y ð6Þ
so that b
uZ is:
b
uZ ¼ b
uX b
uY ð7Þ
and:
n
X 0
S ¼ ð1=ðn 1ÞÞ zj b
uZ zj b
uZ ð8Þ
j¼1
This test statistic is distributed as F(M 1,n M þ 1) under the null hypothesis (Anderson,
1984; Chapter 5). Recall that in our application, n equals 9 months and M equals five assets,
so the F-statistics have 4 and 5 degrees of freedom.13
2.2.3. Comparing individual weights: the t tests

To test the equality of two individual asset means, we can use a two-sample t test. Again
allowing for unequal variances, the test statistic for any asset ‘‘i’’ is:
12
Covariance matrix equality was rejected at the 5% level in 46 of 54 cases, and at the 1% level in 43 of 54 cases.
13
Strictly speaking, as Anderson notes, the T2 test assumes that the numbering of the observations in the two samples
is independent of the observations themselves. This assumption is likely to be violated in a time series setting. We
checked the sensitivity of our results to the violation of this assumption by repeating the test with observations random-
ized within each 9-month window, and the results show no qualitative differences.
uiX b
b uiY
t ¼ pffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi ; ð9Þ
ðs2X =n þ s2Y =nÞ
where s2X is the sample variance for the asset ‘‘i’’ logratio before month t, and s2Y is the sample
variance for the asset ‘‘i’’ logratio after t (note that the ‘‘i’’ subscript has been suppressed for the
variances). The degrees of freedom for this univariate BehrenseFisher problem must be ap-
proximated. We use the ‘Welch approximation’ described in Bickel and Doksum (1977, Chap-
ter 6):
1
dfz c2 =ðn 1Þ þ ð1 cÞ2 =ðn 1Þ ; ð10Þ
where c equals ½ðs2Y =nÞðs2X =n þ s2Y =nÞ1 . The approximate degrees of freedom range theoreti-
cally from a low of (n 1), when s2Y is much larger than s2X, to a high of (2n 2) when s2X equals
s2Y.
Note that a negative value for the t-statistic means that the portfolio weight for the numerator
asset ‘‘i’’ has risen relative to that for the denominator asset M. (Conversely, a positive t-statistic
indicates a fall in the numerator asset weight relative to the denominator.) This could result
from one of three types of reallocations: (1) money moves out of the denominator asset M
into the numerator asset ‘‘i’’, (2) money moves into both assets ‘‘i’’ and M, but the increase
for ‘‘i’’ is greater, or (3) money moves out of both ‘‘i’’ and M, but the decrease for ‘‘i’’ is
smaller. Since we are primarily interested in (1), we will need to examine all asset pairs to dis-
tinguish changes consistent with (1) from cases (2) and (3).
2.3. Potential for diversification
Much recent work has raised issues about the usefulness of international diversification be-
cause of increases in correlation, both generally over time and during extreme market moves.
For example, Longin and Solnik (1995, 2001) show that conditional correlations have risen
over the past 30 years, and that correlations rise during periods of high volatility. Most impor-
tantly for our work, the rise is particularly high in volatile bear markets. If good diversification
opportunities do not exist, then managers may not be able to find alternate countries that are
attractive when compared to their current portfolio. In such an instance, a manager who wishes
to time the national markets may not be able to do so in any way that our test would measure.
To address this potential problem as it applies to our analysis, we examine possible combi-
nations of assets in our sample and show that economically significant diversification opportu-
nities exist in our sample. First, in Table 1 we provide the correlation coefficients and other
basic statistical information based on the MSCI monthly index returns for our sample countries
during our sample period. Correlation values range from a low of 0.2294 (US, Netherlands) to
a high of 0.8087 (US, Canada). Twelve of the remaining 28 coefficients are below 0.5.
These index correlation coefficients are calculated based on monthly returns, to match our
monthly data, and we cannot directly investigate the findings of Longin and Solnik for high
volatility periods within each month for our sample with this data. This is an important issue
for our results because the two October periods we examine are quite volatile. To try and
get at the same point, we instead provide simulation results for two different pairs of portfolios:
one formed by investing in the UK and the US versus the UK and Canada, and then one formed
by investing in Germany and the Netherlands versus Germany and Switzerland. The intent is to
Table 1
Statistics across sample markets (1985e1990)
Canada France Germany Japan Netherlands Switzerland UK US
A. Correlations
Canada 1 0.4353 0.3011 0.2396 0.6854 0.5241 0.6385 0.8087
France 1 0.7121 0.4663 0.6305 0.6349 0.5246 0.4925
Germany 1 0.3116 0.7128 0.7503 0.4810 0.3736
Japan 1 0.4017 0.4106 0.4135 0.2294
Netherlands 1 0.7655 0.7175 0.6333
Switzerland 1 0.6545 0.5287
UK 1 0.6072
US 1
B. Returns and standard deviations
Return 0.0077 0.0228 0.0206 0.0207 0.0163 0.0166 0.0178 0.0106
S.D. 0.0516 0.0770 0.0800 0.0821 0.0500 0.0635 0.0695 0.0510
C. Actual monthly returns, October 1987 and 1989
1987 0.027 0.017 0.098 0.040 0.077 0.056 0.048 0.088
1989 0.008 0.061 0.061 0.051 0.052 0.053 0.050 0.018
see if our mangers should have been able to find portfolios using the monthly data available that
would have provided significant diversification; i.e., can they find better positions through di-
versification using only monthly data? These country comparisons were chosen only because
the correlations for the UK and Germany with the other countries are quite close in value to
each other and relatively high in absolute value. In other words, these countries seemed to offer
relatively low diversification opportunities in our sample. If the portfolios formed work well,
we would expect the rest of the sample to provide even better opportunities. We had no priors
on outcome.
Data and results for the simulations are presented in Table 2. We see evidence that econom-
ically important diversification is possible. Panel 2-A in the table shows results for return and
variance for equally weighted portfolios, where all calculations were made using actual sample
statistics. If we compare portfolios #1 and #2, we see a difference in monthly expected return of
0.14%, with virtually no increase in risk (risk numbers are identical due to rounding). On an
annual basis, this would be an improvement. Conversely, comparing portfolios #3 and #4 shows
almost no difference in return, but the change in risk is relatively high for a minimum variance
frontier.14
In Panel 2-B we present actual portfolio monthly returns for the 2 months that our analysts
do not show timing ability e October 1987 and 1989. If we compare these to the actual country
returns during that month, which are in Table 1, we see significant differences in return between
the pairs of comparison portfolios. For example, the actual monthly loss in the US MSCI index
in October 1987 was 0.088%. In contrast, the UK/US portfolio actual loss would have been
0.068% and the UK/Canada portfolio actual loss would have been only 0.038%. Similarly,
the actual returns for these portfolios in October 1989 were much higher than individual
country returns.
14
Many additional combinations were checked as well. While not all provided good diversification opportunities, the
results presented are representative of those that do. The key point is that several such opportunities existed for our
managers given the correlation structure in the data.
Table 2
Possible portfolios
Panel 2-A: Portfolios with actual correlations
Portfolio Correlation Country Weights Monthly return Monthly std. dev.
#1 0.61 UK 0.5 0.0142 0.1615
US 0.5
#2 0.64 UK 0.5 0.0128 0.1615
CAN 0.5
#3 0.71 GER 0.5 0.0184 0.1804
NETH 0.5
#4 0.75 GER 0.5 0.0186 0.1902
SWITZ 0.5
Panel 2-B: Actual monthly returns

Portfolio Correlation Country Weight Return
Actual returns, October 1987
#1 0.61 UK 0.5 0.0677
US 0.5
#2 0.64 UK 0.5 0.0376
CAN 0.5
#3 0.71 GER 0.5 0.0876
NETH 0.5
#4 0.75 GER 0.5 0.0769
SWITZ 0.5
Actual returns, October 1989
#1 0.61 UK 0.5 0.0340
US 0.5
#2 0.64 UK 0.5 0.0291
CAN 0.5
#3 0.71 GER 0.5 0.0768
NETH 0.5
#4 0.75 GER 0.5 0.0770
SWITZ 0.5
Finally, we note that the impact on portfolio weights from having high correlations is unclear
in the literature. Ang and Bekaert (2004) show that effects are negligible when risk aversion is
low, while Das and Uppal (2002) disagree. Both papers rely on regime switching models, which
do satisfy the Longin and Solnik critique about underlying distributions for returns. We believe
this issue needs further investigation for researchers to be able to make general statements about
diversification, but we are confident that diversification opportunities do exist in our sample.
2.4. Empirical results
In this section we use the logratio test methodology described above to identify periods of
significant portfolio rebalancing during 1985e1990 and to formally test whether managers
anticipated the three major moves of interest: the crash of October 1987, the smaller crash
of October 1989, and the Japanese stock market drop of early 1990. We first discuss the general
pattern of results, and then analyze the specific months around each event in more detail. We
Value of F Statistic Hundreds

4
0
1:86 1:87 1:88 1:89 1:90
Time
Fig. 2. F-statistic for portfolio. Notes: F-statistic for October 1989 is larger than shown; graph was truncated to preserve
visual scale at a useful level.
also calibrate our results by examining a baseline period of little extreme market activity
in 1996.
2.4.1. General patterns in results

The hypothesis of a change in portfolio weights from one time period to the next can be for-
mulated as a test of whether the average of portfolio weights after a given date is significantly
different from the average of portfolio weights for a sample of previous months. Given the 72
months in the sample 1985:1e1990:12 and our 9-month comparison window, the joint F and
individual t tests described above are repeated 54 times. We present the results for some specific
months in tabular form, and provide graphs of the entire series, as well.
The F test is invariant to the choice of the denominator for the logratios, since it incorporates
comparisons between all asset pairs simultaneously. Fig. 2 presents the entire series of monthly F-
statistics for the hypothesis of overall portfolio rebalancing. We note that the logratio F test is quite
sensitive: a reallocation between just one asset pair is usually enough to generate a significant F-
statistic. Hence, we were not surprised to find that all the months in our sample show significant F
values, ranging in size from a low of 5.62 (August 1986) to a high of 413.8 (October 1989). The
critical values for the F(4,5) statistics are 5.192 for 5%, and 11.391 at the 1% level.
The individual t test, which looks only at rebalancing between the numerator asset and the
denominator asset, is not invariant to the choice of denominator asset. One must look at how the
numerator asset share changes relative to every one of the other assets to get a complete picture
of the rebalancing, and individual t-statistics for all asset pairs must be calculated. The pairwise
t-statistics for each asset as the denominator asset are graphed in five separate panels e one for
each denominator e in Fig. 3AeE. Since we examine five assets, there are 20 possible pairs of
numerator ‘‘i’’ and denominator M (for M not equal to ‘‘i’’).
These graphs show that the most significant t-statistics are in October 1989.15 The patterns
of t-statistics confirm the movement of funds out of Japan as the dominant feature of that
15
Recall that the degrees of freedom for the t-statistics are approximate in this application. They range in value from 8
to 13.2, so that the critical values range from 2.157 to 2.306 at the 5% level, and from 3.005 to 3.355 at the 1% level.
Germany as denominator Japan as denominator

30 20
t<0; numerator rise greater than denominator rise

10
20
Value of t-Statistics
t>0; numerator rise less than denominator rise
0
10
-10
0 t<0; numerator rise greater than denominator rise
-20
t>0; numerator rise less than denominator rise
-10 -30
A B
-20 -40
10:85 10:86 10:87 10:88 10:89 10:85 10:86 10:87 10:88 10:89
Oct 87 Oct 89 Oct 87 Oct 89
Time Time
Japan U.K. U.S. Cash Germany U.K. U.S. Cash
U.K. as denominator U.S. as denominator

30 30
t<0; numerator rise greater than denominator t<0; numerator rise greater than denominator
20
20
t>0; numerator rise less than denominator t>0; numerator rise less than denominator
10 10
0 0
-10 -10
C D
-20 -20
10:85 10:86 10:87 10:88 10:89 10:85 10:86 10:87 10:88 10:89
Oct 87 Oct 89 Oct 87 Oct 89
Time Time
Germany Japan U.S. Cash Germany Japan U.K. Cash
Cash as denominator
30
t<0; numerator rise greater than denominator asset

20
t>0; numerator rise less than denominator asset
10
-10
E
-20
10:85 10:86 10:87 10:88 10:89
Oct 87 Oct 89
Time
Germany Japan U.K. U.S.
Fig. 3. Pairwise t-statistics.
month. However, the asset reallocations prior to October 1989 and prior to October 1987 follow
less obvious patterns. We therefore examine these time periods in more detail.
Tables 3 and 4 present the specific numerical results of our t tests and F tests around the
months of particular interest e October 1987 and October 1989. Since a rebalancing from nu-
merator asset ‘‘i’’ to denominator asset M is just the reverse of a rebalancing from numerator M
to denominator ‘‘i’’, the t-statistics in these two cases are equal and opposite in sign. For this
reason, only the 10 unique t-statistics are reported in each panel. Table 5 shows the same in-
formation for the months of September, October, and November 1986, which were chosen
Table 3
Months surrounding 1987 crash. Individual t tests and overall F test of portfolio change; numerator is column asset,
denominator is row asseta (t < 0 indicates movement from denominator to numerator asset; t > 0 indicates movement
from numerator to denominator asset)
Individual asset t-statistic
Assets Japan UK US Cash
A. August 1987
Germany 2.60* 2.92* 0.83 2.29*
Japan 1.99 2.40* 0.75
UK 5.17** 0.64
US 1.75
Overall F test: F(4,5) statistic ¼ 90.29**
B. September 1987
Germany 2.73* 2.26* 0.23 2.92*
Japan 0.63 3.00* 1.14
UK 4.88** 0.53
US 2.78*
C. October 1987
Germany 2.76* 1.76 1.09 4.06**
Japan 0.35 4.09** 1.75
UK 4.71** 1.81
US 4.87**
D. November 1987
Germany 2.61* 0.82 3.20** 5.34**
Japan 1.51 5.26** 2.51*
UK 4.18** 4.04**
US 9.98**
a
Note: An * or ** indicate significance at 5% or 1% level, respectively.
as baseline comparison months (i.e., months during the same season but in a year without a ma-
jor market drop). We now discuss the results for each of these periods.
2.4.2. The October 1987 crash

Consider first the results in Table 3A through D for August through November 1987, the
months surrounding and including the October 1987 crash. While all months have significant
F-statistics, they vary widely in size (from approximately 50 to 197). Based on these F-
statistics, it appears that larger amounts of rebalancing were occurring in September and October,
as compared to August and November. However, this activity should not necessarily be interpreted
as evidence that investors anticipated the crash, as an examination of the individual asset t-sta-
tistics will show.
If investors anticipated the October crash, then we would expect to see world market timing
in the form of significant movements out of all stock markets and into cash prior to, or possibly
during, October. Instead, there are very significant reallocations of funds from one country to
another from August through November; from the US to Japan and the UK, as well as from
Germany to Japan. For example, in August (Table 3A), we read across rows and see statistically
significant increases in the amount invested in other countries relative to Germany, except for
the US (whose t-statistic is negative, but insignificant); a significant increase in holdings in
Japan relative to the US; and a significant increase in the UK holdings relative to US holdings.
Additionally, all but one of the cash t-statistics are negative in August through November, in-
dicating movements out of (rather than into) cash, although they are not all significant. Thus,
while there are some reallocations from stocks into cash the general patterns are inconsistent
with anticipation of the markets’ simultaneous drop.16 We conclude that the bulk of evidence
is against the hypothesis of world market timing.
2.4.3. The October 1989 drop

Now, consider Table 4A through C for SeptembereNovember 1989. The F-statistic of 413.8
for October 1989 (Table 4C) is the largest, by far, in our sample (the next largest F-statistic is
197.57 in October 1987). Once again, the crash month and the prior month (October and
September, respectively) show substantial rebalancing between stock markets. However, we
do not see the generalized movement into cash that the world market timing hypothesis would
predict. As was true in October 1987, two of the four cash-as-numerator t-statistics are negative
and significant, indicating some increase in cash relative to other assets. However, unlike
October 1987, the remaining two cash t-statistics are positive.
What we do see in October 1989 are dramatically large and negative values for all the t-statistics
with the Japanese asset as denominator. This indicates a large increase in holdings in all other
assets relative to holdings of Japanese assets. The large relative size of these t-statistics is
particularly apparent in panel B of Fig. 3, which shows the evolution over time of the t-statistics
with Japan as the denominator asset; October 1989 values are huge compared to the rest of the
series.
The October 1989 crash had a more uneven effect on world markets than the October 1987
crash. Did investors anticipate the differential effects of the crash and engage in national market
timing? The evidence does not support this hypothesis. The movement out of Japanese stocks
could not have been a response to (or anticipation of) the October 1989 crash, since the Japa-
nese market fell much less than other markets.
Further examination shows that the patterns of t-statistics noted in October 1989 are repeated
in the following months, through February 1990, but with gradually decreasing significance.
Moreover, the F-statistics in these other months are a great deal lower. Clearly, October
1989 was the key month for the pension fund managers.
To summarize, we observe a dramatic portfolio reallocation in October 1989, which is not
consistent with either the world or national market timing behavior that we would expect to be
related to the 1989 crash. Instead, we see uniform movement out of Japan, even though that
market continued to rise until January 1990. This leads us to conclude that the majority of ac-
tivity surrounding the market drop in October 1989 was due to rebalancing in anticipation of
the drop in the Japanese market that began in January 1990.17
16
As noted in Section 2.2.3 above, the t-statistic for a pair of equity markets could be significant if holdings in both
assets fell, but one fell more than another. Thus, it is possible that the significant t-statistics for equity market pairs rep-
resent differential movements out of stocks into cash. Looking back at Fig. 1, we can rule out this possibility.
17
As discussed above, there is much anecdotal evidence that US managers had been anticipating a major drop in Japan
for some time. However, our results clearly suggest that our sample of managers made their move at a specific time just
before the Japanese market fell.
Table 4
Months surrounding 1989 market drop. Individual t tests and overall F test of portfolio change; numerator is column
asset, denominator is row asseta (t < 0 indicates movement from denominator to numerator asset; t > 0 indicates move-
ment from numerator to denominator asset)
A. September 1989
Germany 8.02** 6.17** 3.78** 2.97*
Japan 8.45** 8.90** 7.18**
UK 5.44** 3.42**
US 0.03
B. October 1989
Germany 23.88** 10.48** 7.14** 3.25**
Japan 29.18** 20.43** 22.82**
UK 5.49** 6.77**
US 1.54
C. November 1989
Germany 9.11** 11.06** 7.65** 5.33**
Japan 7.11** 8.24** 6.71**
UK 5.12** 3.86**
US 0.66
D. December 1989
Germany 6.33** 5.48** 6.64** 9.65**
Japan 5.41** 5.72** 4.42**
UK 2.13 1.55
US 0.16
E. January 1990
Germany 5.03** 2.93* 4.73** 0.96
Japan 4.53** 4.57** 3.69**
UK 0.85 1.58
US 0.95
F. February 1990
Germany 4.04** 1.26 2.46* 0.33
Japan 4.14** 4.02** 3.42**
UK 0.18 1.75
US 1.56
a
Note: An * or ** indicate significance at 5% or 1% level, respectively.
2.4.4. Baseline period around and including October 1986

To calibrate the findings for 1987 and 1989, we briefly examine the results in Table 5AeC
for the baseline months of September, October and November 1986, a period with little
volatility in market values. The F-statistics range from 10.56 to 13.49, which e while still
significant e makes them quite small relative to the values in 1987 and 1989. Given the
range of F-statistics in the overall sample, the values here are clearly toward the small
Table 5
Baseline period in 1986. Individual t tests and overall F test of portfolio change; numerator is column asset, denomi-
nator is row asseta (t < 0 indicates movement from denominator to numerator asset; t > 0 indicates movement from
numerator to denominator asset)
A. September 1986
Germany 0.53 1.60 0.23 0.80
Japan 1.79 1.06 0.57
UK 3.74** 2.71*
US 1.05
B. October 1986
Germany 0.55 2.28* 0.39 0.80
Japan 3.31** 0.20 0.61
UK 5.10** 3.44**
US 0.75
C. November 1986
Germany 2.61* 0.82 3.20** 5.34**
Japan 1.51 5.26** 2.51*
UK 4.18** 4.04**
US 9.98**
a
Note: * and ** indicate significance at 5% and 1% levels, respectively.
end of the spectrum. This is consistent with Fig. 1, which shows relatively little activity
around October 1986.
Now consider the t-statistics for these months: September and October have few significant
statistics, while November has more. But, with the exception of the November columns for the
US and cash assets e which show significant increases in US positions and significant de-
creases in cash positions relative to the other assets e there are few patterns in the t-statistics.
Thus, we interpret the baseline case as having ‘‘normal’’ activity, which is not associated with
market timing behavior in anticipation of any particular market moves.
3. Analysis of portfolio return data for mutual fund managers
Based on the behavior of the pension fund portfolio weights, we have reasoned that the sig-
nificant shift in portfolio holdings in October 1989 occurred in anticipation of the subsequent
fall in the Japanese market. However, with only data on weights we are unable to provide de-
finitive evidence that this portfolio rebalancing was related to market return expectations. A
standard way to address such a question is to evaluate portfolio performance with a timing
model which explicitly relates portfolio return to portfolio positions. Since we do not have
data on the returns earned by the sample of pension fund managers, we turn to the returns
earned by global equity mutual funds during the same period for our performance analysis.
The remainder of this section is organized as follows. We first describe two variants of
a model for evaluating the performance of a global mutual fund. The first variant allows for
world market timing behavior, and the second variant incorporates national market timing.
Then we describe the data on global mutual funds for a sample period of January 1985 to
September 1994. Finally, we report the results from tests for world and national market timing
ability on the part of these mutual fund managers.
3.1. Global market timing models
Consider evaluating global manager performance relative to a world benchmark using a stan-
dard equation based on the world CAPM:
Ri;t ¼ ai þ bi RW;t þ mt ; ð11Þ
where Ri,t is the excess return on manager i’s portfolio in time period t, RW,t is the excess return
on the world market index in period t, and ai is ‘Jensen’s alpha’, the standard measure of stock
selection ability. Excess returns are computed relative to a risk free rate.
Suppose that the manager engages in market timing, shifting funds out of cash and into
the world market when the market is expected to rise and shifting funds into cash when
the market is expected to fall. Then, using the notation of Chen et al. (1992), b varies as
follows:
i þ Q RW;t þ 3i;t ;
bi ¼ b ð12Þ
i
where bi is the average level of bi and Qi, the market timing coefficient, is positive (the man-
ager increases systematic risk when the market is expected to rise and decreases it when the
market is expected to fall). Substituting (12) into (11), we have:
i þ Q RW;t þ 3i;t ÞRW;t þ mt
Ri;t ¼ a þ ðb i
ð13Þ
¼ a þ bi RW;t þ Qi R2W;t þ ð3i;t RW;t þ mt Þ
The hypothesis of world market timing ability corresponds to a significant coefficient Q on the
squared term.18 Note that the compound error term in (13) is likely to be heteroskedastic.
We now model national market timing by extending the quadratic regression approach to
a multi-index framework. This extension is based on the intuition that a mutual fund can be
viewed as a combination of portfolios for different asset classes. This suggests that a mutual
fund’s return could be evaluated with a multi-index model that includes a passive portfolio
for each asset class.
Several domestic performance studies apply market timing measures to multi-index or
multi-factor models. For example, Elton et al. (1993) take this approach in evaluating domestic
(US) mutual funds relative to three passive portfolios: the S&P 500, non-S&P (small capitali-
zation) stocks, and bonds. The idea of market (or sector) timing among multiple portfolios is
also discussed in Admati et al. (1986) and Lehmann and Modest (1987). In particular, Lehmann
and Modest implement a quadratic regression with squared terms for each of the factors that
they examine.
Following the intuition of such multi-index models, we evaluate global funds against a model
that includes indexes representing each of the national markets where they invest. For
18
Based on the linear model of Eq. (13), we would expect the coefficient to be positive. However, if managers engage
in non-linear strategies using derivatives, then we might see a negative and significant coefficient on a squared term (see
Jagannathan and Korajczyk, 1986).
parsimony, we cover the world asset menu by including five indexes (whose excess returns are
Rj,t for j ¼ 1e5): the market indexes of Germany, Japan, the UK, and the US, and a ‘‘rest of
world’’ (ROW) index created by taking the residuals from a regression of the world index
on the four national market indexes.19
Applying the Treynor and Mazuy (1966) quadratic regression approach to our multi-index
model results in an estimating equation similar to (13), with the exception that there are five
squared terms, which correspond to the five indexes, instead of just one:
X X
Ri;t ¼ a þ i;j Rj;t þ
b Qi;j R2j;t þ ð3i;t RW;t þ mt Þ ð14Þ
j j
The hypothesis of national market timing ability corresponds to a statistically significant and
positive Q coefficient on one (or more) of the squared terms.20 World market timing can be
assessed by examining patterns in these coefficients for movements from countries to cash.
3.2. Global mutual fund data
Global mutual funds were rare before the early 1980s and only became numerous in the mid-
1990s.21 We were able to obtain data on the returns for eight global equity mutual funds that
existed as far back as January 1985 and a ninth that began in January 1986, matching the be-
ginning of our portfolio weight data series. The original data are monthly, but they are aggre-
gated (compounded) to quarterly levels because previous studies have shown greater stock
market predictability for quarterly or longer horizons than for monthly ones.22 In order to
have sufficient degrees of freedom for the quarterly analysis, the sample period is extended
through September 1994. All returns include dividends and are computed in excess of the (com-
pounded) 1 month LIBOR rate.23
The national return indexes are the same as those described above. The world return index is
the Morgan Stanley Capital International Perspective World Index, including dividends.
19
Elton et al. (1993) also use orthogonalized indexes. As they note, with orthogonalization the index can no longer be
interpreted as the return on a passive portfolio.
20
It is important to note that using the world market index as one component in the multi-country timing regression
(14) is not equivalent to assuming PPP, as discussed in Glassman and Riddick (1996). Rather, in this instance we are
using the world index variable as only one factor in our timing regression. The use of individual country indices allows
for recognition, albeit crude, of the effects that create PPP deviations. The same cannot be said about the model in Eq.
(13). As we noted earlier in the paper, timing models of this form are necessarily subject to the limitations of the un-
derlying model.
21
We are interested in reflecting the characteristics of our portfolio weight sample in this sample of mutual fund re-
turns. Thus, we are only interested in global funds, since they have a mandate to invest in domestic as well as foreign
assets and we are interested in shifts in holdings between the US and foreign markets. Thus, we do not include funds
which are international funds, meaning they only invest in non-US assets.
22
See, e.g., Fama and French (1989). Similarly, the Grinblatt and Titman (1993) benchmark-free performance analysis
uses quarterly data.
23
These data were obtained from Datastream. The nine funds are: Dean Witter Worldwide, First Investors Interna-
tional Securities Fund, Merrill Lynch International Holdings, Morningstar, New Perspective Fund, Paine Webber Atlas
Fund, Prudential Global Fund, SoGen International Fund, and United International Growth Fund. The first eight funds
have monthly data going back to January 1985; the series for the ninth fund starts in January 1986.
Table 6
World market timing regression results Eq. (13) (t-ratios in parentheses)
Fund World World2 Intercept
1 0.833 (7.052) 5.20 (0.801) 0.003 (0.450)
2 0.326 (0.963) 7.512 (1.951) 0.064 (2.166)
3 0.732 (5.845) 0.119 (0.180) 0.009 (1.002)
4 0.681 (4.089) 0.733 (0.826) 0.005 (0.603)
5 1.009 (4.294) 0.656 (0.247) 0.002 (0.172)
6 0.926 (6.522) 0.247 (0.285) 0.002 (0.172)
7 0.566 (2.143) 0.455 (0.339) 0 (0.013)
8 0.880 (4.420) 1.052 (1.041) 0 (0.015)
9 0.742 (8.577) 0.126 (0.268) 0.006 (0.749)
Notes:
1. Sample period: 1985:Ie1994:III (39 quarters) for funds 1e8.
2. Sample period: 1986:Ie1994:III (35 quarters) for fund 9.
3. Degrees of freedom: 36 for funds 1e8; 32 for fund 9.
4. Critical values (two-sided tests):
DF ¼ 36: 5% level is 2.028, 1% level is 2.719
DF ¼ 32: 5% level is 2.037, 1% level is 2.738
3.3. Results from world and national market timing regressions
Table 6 reports estimates of the world market timing regression, Eq. (13), for the nine global
mutual funds, with the Morgan Stanley World Index used for RW. To correct for heteroskedas-
ticity, the varianceecovariance matrix of the coefficients was estimated using the procedure of
White (1980). These regressions provide no evidence of world market timing ability: none of
the world market timing coefficients is significant, and seven of the coefficients are negative.
Only one a (intercept) is positive and significant. These results are similar to those in much
of the literature on market timing, e.g., see results in Kao et al. (1998). The results are also
consistent with our conclusions from the examination of pension fund portfolio weights.
These results for world timing are in contrast to the results for national market timing regressions
in Eq. (14), reported in Table 7. All of the funds except the fourth have at least one statistically sig-
nificant timing coefficient, and we find 13 significant coefficients on the quadratic terms (28.9% of
the 45 squared terms in the nine regressions). Six of the 13 significant coefficients are positive, and
five of these six are coefficients on the Japanese market. As discussed above, positive coefficients
show that managers are correctly anticipating rises and drops in a market, so this group of managers
appears to time correctly about half the time. This is not an impressive set of results when taken in
total. However, the fact that virtually all the good timing choices were made with respect to Japan
suggests that something about the managers’ timing abilities for that country were not random.
The intercepts in the national market timing regressions indicate that the mutual fund man-
agers have very little stock selection ability. Only two of our nine intercept terms are positive,
and only one of these is statistically significant. This suggests that single index model timing
results in other studies may fail to show significant selection abilities because they fail to
consider national market timing as a separate possibility from world market timing.24 Further
research is needed to draw strong conclusions.
24
World timing ability in Eq. (14) would be captured in simultaneous movements rather than by one coefficient, as in
Eq. (13). We do not see such simultaneous movements here.
Table 7
National market timing regression results, Eq. (14) (t-ratios under coefficients)
Fund ROW Germany Japan UK US ROW2 Germany2 Japan2 UK2 US2 Intercept
1 1.095 0.077 0.131 0.305 0.431 1.163 0.305 0.393 0.840 1.006 0.010
2.370 1.219 3.619 3.256 3.930 0.033 0.950 2.730 1.773 1.395 1.329
2 1.161 0.410 0.092 0.789 0.479 5.401 2.187 0.123 9.362 3.538 0.092
1.164 2.063 1.064 2.293 1.337 0.074 2.416 0.188 2.902 1.650 3.135
3 0.454 0.099 0.012 0.050 0.587 7.515 0.128 0.414 0.020 0.812 0.021
0.860 1.646 3.199 0.465 5.223 0.218 0.474 2.299 0.034 1.100 1.665
4 0.456 0.071 0.012 0.050 0.629 10.960 0.427 0.189 0.785 1.363 0.001
0.818 1.155 0.313 0.474 6.105 0.294 1.387 1.165 1.208 1.413 0.064
5 1.886 0.066 0.064 0.302 0.804 31.410 1.041 0.611 0.157 4.031 0.020
2.151 0.658 0.940 1.700 4.850 0.500 1.901 2.657 0.188 3.200 1.273
6 1.081 0.059 0.149 0.258 0.437 27.651 0.271 0.367 0.913 2.591 0.010
1.377 0.708 2.640 2.013 2.947 0.491 0.688 1.672 1.219 3.011 0.835
7 1.049 0.082 0.065 0.060 0.732 17.413 0.505 0.850 2.253 4.679 0.009
1.298 0.837 1.033 0.442 4.515 0.358 0.906 3.419 2.276 3.064 0.642
8 0.902 0.043 0.039 0.454 0.594 15.987 0.227 0.337 0.207 2.624 0.002
1.492 0.539 0.683 3.189 5.653 0.451 0.753 1.970 0.314 3.591 0.184
9 1.005 0.340 0.129 0.096 0.259 70.847 0.413 0.555 0.005 0.449 0.009
2.809 4.540 4.469 1.092 2.178 2.703 1.089 3.771 0.011 0.562 1.351
Notes:
1. Sample period: 1985:Ie1994:III (39 quarters) for funds 1e8.
2. Sample period: 1986:Ie1994:III (35 quarters) for fund 9.
3. Degrees of freedom: 28 for funds 1e8; 24 for fund 9.
4. Critical values (two-sided tests):
DF ¼ 28: 5% level is 2.048, 1% level is 2.763.
DF ¼ 24: 5% level is 2.064, 1% level is 2.797.
5. ROW is a variable constructed to be rest of world; i.e., the world index excluding Germany, Japan, UK, and US.
In summary, our conclusions from the mutual fund market timing regressions are consistent
with the results for the pension fund data. The fund managers in this sample show no world
market timing ability, but several have statistically significant national market timing ability
with respect to the Japanese market. This did not necessarily mean that their overall perfor-
mance was good, given other bad timing choices, but it does suggest that they were able to an-
ticipate the Japanese market’s drop.
4. Summary and conclusions
This paper examines the global equity market timing behavior of US pension and mutual
fund portfolio managers. We begin by distinguishing between world market timing and na-
tional market timing, a distinction which is based on the pattern of portfolio rebalancing
among asset classes. World market timing implies a reallocation of all equity market funds
to or from cash, while national market timing implies a reallocation of funds from those equity
markets expected to have relatively low returns to those expected to have relatively high
returns.
We test for both national and world market timing in two ways. The first analysis uses
monthly, country-specific portfolio weights for US pension fund managers with a global man-
date. The country level disaggregation of data makes it possible for us to measure cross-border
shifts in portfolio holdings for each month in our sample. We use the logratio test methodology
to determine whether these movements are statistically significant. This approach requires no
specification of an underlying asset model or benchmark portfolio, a characteristic which is
both a strength and a weakness of the test procedure. While it makes it possible for us to iden-
tify statistically significant movements between countries around key market movements, it
does not allow us to definitively show that the movements resulted from skill rather than
luck. We perform our second analysis on a set of return data for a sample of US mutual
fund managers who also invested globally during the same time period. For this evaluation,
we model national market timing by extending a global returns model to include multiple na-
tional market indexes. This approach does require the identification of an underlying model, but
allows us to assess performance relative to a benchmark for skill attribution.
Our results from the first analysis suggest that the October 1987 crash and the smaller crash
of October 1989 were unanticipated by the pension fund managers. While there is some reba-
lancing activity prior to these events, there is no statistically significant, across-the-board move-
ment into cash. In contrast, we observe a dramatic reallocation of assets out of Japan in October
1989. The actual pattern of reallocations among national markets is consistent with managers
anticipating the Japanese market drop that began in January 1990, rather than as their response
to the concurrent world mini-crash. These conclusions are supported by the results from the
mutual fund performance evaluation. While the mutual fund managers do not necessarily
time well in other markets, we do find evidence of significant national market timing ability
with respect to Japan over the period. We find virtually no evidence of world market timing
ability for either group.
In addition to these specific findings about the ability of US fund managers to time the Jap-
anese market, our results indicate that single index models are not appropriate for assessing
global performance, though this has been the standard in many earlier papers. Such models
look at timing only with respect to the world market and would not be able to identify the per-
formance with respect to Japan that we find during this period. This emphasizes the general
lesson that it is important to account for both world and national market timing in building
any global performance evaluation model. This fact may explain why earlier work failed to
identify much timing ability among international fund managers.
Finally, our results are based on an analysis of global fund data and cannot be directly in-
terpreted as meaningful for domestic funds managers. However, domestic managers face essen-
tially the same problem as global managers in that they simultaneously move money between
asset classes (as opposed to countries) and cash. Thus, extensions of our techniques may prove
valuable for more detailed studies of domestic portfolio management.
Acknowledgements
This research was partially supported by a faculty development grant from the American
University and by the Graduate School Research Fund of the University of Washington. We
wish to thank Dana Schmidt of Morgan Stanley and Gunter Ecklebe of the Frank Russell Com-
pany for providing data. Jeffrey Weiss of Frank Russell was particularly helpful in assembling
the data. Wayne Ferson, Ted Jaditz, Helen Popper, Michel Robe and an anonymous referee pro-
vided useful comments, as did seminar and meeting participants at Georgetown University, the
University of Wisconsin-Milwaukee, Simon Fraser University, and the Financial Management
Association. We appreciate the research assistance provided by Sharmila Srivastav. The usual
caveat applies.
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Market timing ability of global fund managers

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Market timing ability of global fund managers

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Journal of International Money and Finance 25 (2006) 1029e1050

Market timing by global fund managers

JEL classification: G11 Portfolio Choice

2. Analyses of portfolio weight data for pension fund managers

We begin by examining the month-to-month changes in portfolio weights for a sample of

Japan and U.S. Weights

Fig. 1. Actual portfolio weights.

2.2. Methodology of the logratio test

2.2.1. The logratio test

2.2.2. Comparing entire portfolios: the F test

where we have dropped the subscript ‘‘t’’ for convenience.

2.2.3. Comparing individual weights: the t tests

2.3. Potential for diversification

Panel 2-B: Actual monthly returns

2.4. Empirical results

Value of F Statistic Hundreds

2.4.1. General patterns in results

Germany as denominator Japan as denominator

t<0; numerator rise greater than denominator rise

t>0; numerator rise less than denominator rise

Japan U.K. U.S. Cash Germany U.K. U.S. Cash

U.K. as denominator U.S. as denominator

Germany Japan U.S. Cash Germany Japan U.K. Cash

t<0; numerator rise greater than denominator asset

t>0; numerator rise less than denominator asset

Germany Japan U.K. U.S.

Fig. 3. Pairwise t-statistics.

2.4.2. The October 1987 crash

2.4.3. The October 1989 drop

2.4.4. Baseline period around and including October 1986

3. Analysis of portfolio return data for mutual fund managers

3.1. Global market timing models

Ri;t ¼ ai þ bi RW;t þ mt ; ð11Þ

3.2. Global mutual fund data

3.3. Results from world and national market timing regressions

4. Summary and conclusions

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