Stock Selection Timing

We argue that active fund managers can pick stocks only when the market presents such opportunities. We propose measures of stock selection opportunity and show evidence that a significant portion of mutual funds time stock selection, i.e., trading more when stock selection opportunities are present. We show that positive timers outperform negative timers by about 1% in annualized four-factor alpha over the subsequent six-month horizon and, more importantly, stock selection timing adds value to investors even after controlling for fund manager stock-picking talent. Finally, we show that funds with higher expense ratios and larger family size exhibit stronger timing skills.