Wednesday, March 19, 2008

Evidence on Market Timing

Following up on my recent post on market timing, I thought I'd give you some evidence of the real-world market-timing abilities of mutual fund investors from the latest semi-annual report of the TFS Capital mutual funds. The data can be found on page 33 in the table "Statements of Changes in Net Assets". I've computed the average price per share data:

Bear in mind that one would think these investors are somewhat sophisticated as this is a market neutral mutual fund, which is a little esoteric. In the year up to June 30th, 2007 shares issued by the fund exceeded shares redeemed by investors by around a 20:1 ratio (13.4 million issued, 740,000 redeemed). The average price of shares issued did exceed the price of those redeemed but giving the benefit of the doubt, maybe the redeemers had bought shares earlier in the period or in previous years. A 2% fee is imposed on redemptions within 6 months of purchase. Redemption fees totalled 0.85% of the value of redemptions so more than 40% of sellers had bought within 6 months of selling. Based on that the average seller made little or no money on their investment.

Things changed dramatically after June 30th. The fund suffered a big loss in August:

though it has recovered nicely since then, especially when compared to the broader market. Including the dividend of 41 cents per share paid in December the fund is near its July 2007 high.

However, masses of investors rushed for the exits. Redemptions exceeded new issuance by a 2:1 margin in the second half of 2007. Redemption fees totalled 1.4% of the value of shares redeemed, so most sellers had bought in the last 6 months. The difference between the average price of shares issued and redeemed was $1.00 - buy high sell low! As you can see from the chart, prices averaged much more than $13.48 in the second half of 2007. Most people who sold, sold right near the bottom.

So the average investor, and even the somewhat more sophisticated investor, is a terrible market timer. As I commented at the time it made more sense to invest in funds such as this one in the second half of 2007 rather than sell out.

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