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Failing to capture factor premiums because of poor timing

Failing to capture factor premiums because of poor timing

04-04-2018 | From the field

Looking for an explanation to the value effect? The value premium’s persistence and magnitude run counter to the behavioral explanation of the value anomaly. How can investors continue to make the same widely recognized mistake? This paper1 provides a hint.

  • David Blitz
    David
    Blitz
    PhD, Executive Director, Head of Quant Selection Research

By examining the difference between mutual funds’ reported buy-and-hold or time-weighted returns, and the average dollar-weighted returns or IRRs end investors earn, the authors quantify the consistently negative effect of value investors’ market-timing decisions: from 1991 to 2013, value mutual fund investors underperformed the funds they invested in by 131 basis points. 

Their analysis also reveals that investors in growth, large-cap, and small-cap funds are similarly prone to unproductive allocation timing. They also find that less sophisticated investors tend to make poorer timing decisions. The authors suggest that, by giving away the excess return, value investors themselves finance the value premium and ensure its continuance.

1Hsu, Myers & Whitby, “Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies”, Journal of Portfolio Management, Vol. 42, No. 2, 2016, pp. 90-98.

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From the field
From the field

Our researchers publish many whitepapers based on their own empirical studies; they also follow quantitative research done by others.

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