Volume 18, Number 4 Article by Ramesh Chander December, 2006
Investment Managers’ Market Timing Abilities: Empirical Evidence from the Indian Capital Market :
Market timing is vital in the investment decision-making process and to investment performance. Portfolio managers time investment decisions, based on their macro forecasting skills, to earn excess abnormal returns. Studying the market timing abilities of investment managers is important to understand how well they have done in achieving the desired return targets and how well risk has been controlled in the process. Studies hitherto have documented inconsistent evidence on the subject. However, their approach has not separated the aggressiveness of a fund manager from the quality of information s/he possesses. Superior investment performance is earned not only by the ability to forecast returns on individual assets but also by the ability to time investment decisions correctly in the volatile stock markets.
Ramesh Chander studied the market timing abilities of investment managers in the Indian capital market based on the performance outcome of 80 investment schemes from the public and the private sectors for the period 1998 to 2002. The study revisited the market-timing proposition inherited from earlier studies and extended the contour of timing performance to fund characteristics, measurement criteria and benchmark indices to investigate performance variability and persistence. The information inputs were examined through performance evaluation measures developed by Fama, Treynor and Mazuy, and Henriksson and Merton.
The results were unable to generate adequate statistical evidence in support of Indian managers’ successful market timing performance, across measurement criteria, fund characteristics, and benchmark indices. Further, they revealed that successful timers failed to maintain their performance while laggard managers improved upon theirs, thus negating the survivorship bias. These results also point to the success of contrarian investment strategies instead of momentum strategies at the market place. The findings have wider significance for investment decision-making and the capital market theory.
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