Cashflow Timing vs. Discount-Rate Timing: An Examination of Mutual Fund Market-Timing Skills

We measure the ability of professional investment managers in timing cashflow versus discount-rate news, the two components of market returns. We find that the average U.S. equity mutual fund exhibits cashflow-timing skills of 1.77%/year, but discount-rate timing of -0.87%/year; furthermore, cashflow-timing skills, but not discount-rate timing skills, strongly persist over future quarters. Our evidence indicates that misspecification of markettiming abilities accounts for the failure of prior research to locate talented timing funds. Importantly, we find that value funds outperform growth funds in timing cashflow news, which provides new evidence on the unique skills of value-oriented mutual funds.