Timing is not Everything—Assessing Manager Skill in Factor Timing

Volume 18, No. 1, 2020
Andrew Chin and Piyush Gupta

We introduce an innovative framework to assess the contribution and persistence of factor timing within US large-cap equity funds. After decomposing active returns into
three components—strategic factor contribution, tactical factor contribution and security selection—we find that they are all significant but security selection is the dominant
contributor. We also find that the portfolio managers who rely on factor timing to drive performance do not seem to exhibit persistence in their abilities. Finally, across all funds,
strategic and tactical factor tilts do not drive future active returns. Security selection is the key differentiator for future outperformance.