A Reexamination of the Market-Timing and Security-Selection Performance of Mutual Funds

An extended and correctly specified version of the Treynor-Mazuy (TM) model is used to examine the market-timing and stock-selection abilities of domestic equity mutual funds. This extended model controls for the inclusion of non-S&P 500 assets in mutual fund portfolios. We document positive and significant market-timing abilities for 633 mutual funds during the 1984-94 period. This finding is in sharp contrast to the negative market-timing abilities found when using the original TM model, which does not control for non-S&P 500 assets. Security-selection abilities are significantly positive, and cross-sectional correlations between market timing and selectivity are significantly negative. The monotonic correlation between turnover and market timing is positive, and that between turnover and selectivity is negative. Neither of these findings is evident with the original TM model or with traditional linear parametric measures of correlation.