Factor Exposure Variation and Mutual Fund Performance

Manuel Ammann, Sebastian Fischer and Florian Weigert

Financial Analysts Journal, 2020, vol. 76, issue 4, 101-118

Abstract: We investigated the relationship between a mutual fund’s variation in factor exposures and its future performance. Using a dynamic state-space version of the Carhart (1997) four-factor model to capture factor variations, we found that funds with volatile factor exposures underperform funds with stable factor exposures by 147 bps a year. This underperformance is explained neither by volatile factor loadings of a fund’s equity holdings nor by a fund’s forced trading through investor flows. We conclude that fund managers voluntarily attempt to time factors but are unsuccessful at doing so.Disclosure: The authors report no conflicts of interest. Editor’s Note Submitted 13 February 2020Accepted 5 August 2020 by Stephen J. Brown

Date: 2020
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DOI: 10.1080/0015198X.2020.1809224

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