Active timing decisions of equity mutual funds

In this paper we examine an aspect of professional investment management which has not been adequately documented and studied; the extent to which equity mutual fund managers actively adjust their portfolio's equity risk exposure over time. Estimates of a portfolio's quarter-end beta are developed using the actual stock holdings of the portfolio at the quarter-end. Changes in these beta estimates from one quarter to the next are shown to arise from both passive and active asset allocation. We find that active risk adjustment dominates passive rebalancing and that equity risk exposure is quite variable over time. Thus, individual investors who estimate the equity risk inherent in a portfolio based on a single time series return beta might seriously misestimate the portfolio's current equity risk. We also test whether active risk management is better characterized as anticipatory of future market events or reactive to past market events.