Evaluating Bond Fund Sector Timing Skill

Reported portfolio data indicate that bond fund managers engage in sector timing behavior. I use simulation procedures to examine the ability of various versions of the Treynor and Mazuy (1966) timing specification to detect positive sector timing skill. Results indicate that the models are unable to detect timing ability at reasonable skill levels for the majority of managers. Alternative measures which compare actual fund returns to the returns from passive strategies using the previous period’s sector weights are better able to detect positive ability at reasonable skill levels. When applied to a sample of general government bond funds, these measures indicate managers may possess positive sector timing ability.