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Q: Specific request for additional research by pafalafa-ga. ( Answered 5 out of 5 stars,   3 Comments )
Subject: Specific request for additional research by pafalafa-ga.
Category: Business and Money > Finance
Asked by: sl7-ga
List Price: $200.00
Posted: 16 Jul 2004 09:58 PDT
Expires: 15 Aug 2004 09:58 PDT
Question ID: 375001
This is a specific request for additional research by pafalafa-ga.
This researcher is looking into books related to mutual fund market
timing. The researcher has come across a good deal of newspaper and
magazine articles and other materials -- many of them from the 1990's
and earlier -- that discuss this topic as well.

I am requesting an answer specifically from pafalafa-ga that would
identify magazine and newspaper articles that discussed mutual fund
market timing as an investment technique.  I am only looking for
articles that were published prior to September 2003, and the earlier
back in time the better.

Thank you for your help.
Subject: Re: Specific request for additional research by pafalafa-ga.
Answered By: pafalafa-ga on 16 Jul 2004 17:59 PDT
Rated:5 out of 5 stars

Hello again, and thank you for directing this question to my attention.

I have reviewed almost 200 articles that appeared prior to September
1993, and that made reference to timing as a strategy for investing in
mutual funds.  The great majority of these were quite generic in
nature, but a number of them -- included in my answer, below --
focused specifically on the type of market timing I believe your
question focuses on.

As I mentioned earlier, I cannot reproduce the articles in full here,
due to copyright protections, but I have provided selected excerpts to
give you the gist of each article.

Undoubtedly, there are other articles yet to be uncovered.  If there
is a particular topic, or theme, or company, or investment guru on
which you would like me to do further research, just let me know by
posting a Request for Clarification, and I'll be more than happy to
continue working on this one for you.

All the best.



The Financial Post (Toronto, Canada)

February 16, 1985

Computers guide mutual funds' timing

A new fund using market timing techniques is the Guardian Computer
Trend Fund, managed by Guardian Capital Investment Council Ltd.,
Toronto. Awaiting approval of the Ontario Securities Commission,
Guardian hopes to launch it in March.

This fund uses a computer program which tells the fund manager when to
buy or sell equities. The fund is the only one in Canada which invests
its assets either entirely in Treasury Bills (Canadian) or entirely in
stocks (in this case, U.S. transportation company shares). Most funds
keep varying portions of their portfolio in stocks and fixed income
securities to protect the initial capital investment.

''It's for the sophisticated investor who wants above-average return
on a long-term investment and who doesn't want to get involved in the
timing of when to buy or sell,'' says Bruce Walters, vice-president,
marketing, Guardian Capital Investment Council Ltd.

Essentially, the fund feeds hourly information on the trading
performance of 30 major transportation companies, traded on the New
York Stock Exchange, into its computer. Based on historical and
current data, the computer gives a buy signal in a rising market, and
a sell in a falling one.


St. Petersburg Times
June 5, 1987

Cost of market-timing service could outweigh potential benefits

Q. I've read a number of articles dealing with market timing and
switching of mutual funds, either by subscribing to newsletters or by
paying fees for managed accounts. I doubt there is any merit to claims
that market timing will outperform an investment in mutual fund shares
held through the ups and downs of market cycles.  I can't see paying
an annual fee equal to 2 percent of the value of my mutual fund
holdings to have a timer switch my investments in a  managed account.
Don't mutual funds charge substantially less and provide good

A timing service moves investments from one type of mutual fund to
another, with the idea of being in the right fund at the right time,
such as into a common stock mutual fund when the stock market is
headed up, then switching into a money market fund when the opposite
...The timers' big pitch is that most mutual funds are too big to sell
all the securities they hold when the market goes against them and if
funds do sell they depress the market further. Timers claim they can
move their clients' accounts efficiently, beating the market and the


The Financial Post 
January 31, 1990

Managers focusing on market timing in turbulent world

Market timing has mutual fund owners concerned in view of recent
turbulence and uncertainty on the world's stock markets....At least
one fund manager does time the market for his clients. Jean-Pierre
Fruchet, president of Guardian Timing Services Inc., has the ability
to go 100% long or short on the market and switches from equity mutual
funds into cash mutual funds in his Canadian Protected fund. By going
long, the fund manager is betting the market will rise in the coming

Two-and-a-half weeks ago Fruchet sold 98% of the equity exposure in
his Canadian fund and went 35% short on the market in his U.S.


St. Louis Post-Dispatch 
November 9, 1992


The recent volatility in the stock market creates a prime opportunity
for investors who use a strategy known as market timing. But they face
greater risk, too. These investors buy and sell stocks or mutual funds
frequently, sometimes even daily, based on an array of technical
factors like trading volume, economic data and stock-price movements.
And in a market moving sharply up and down, the frequent trader has
more of a chance for sharp gains - or losses.

Today there are six mutual funds that rely on market timing to manage
their investments and several more designed for people who use market
timing on their own. In addition, some newsletters tell investors when
to buy and sell shares of mainstream funds - those that do not use
timing....Only one of the three funds in existence for five years, the
Righttime Blue Chip Fund, beat the stock fund average....Perhaps more
telling are the two funds that shut their doors last year. The
Monitrend Value Fund lost 0.5 percent a year for the five years ended
April 30, 1991, when it finally died...Another victim was the Lowry
Market Timing Fund. Lowry rose 6.5 percent a year for the five years
ended July 31, 1991, when it shut down.


The Financial Post
April 4, 1997

Market timers reject the buy-and-hold approach

The Toronto Society of Technical Analysts last week invited one of the
more respected fund switchers, Harland Hendrickson, to reveal some of
his secrets.

TSTA members normally apply technical analysis in order to trade
stocks or futures directly, and sometimes indexes. Hendrickson takes a
similar tack, but switches between mutual funds rather than stocks.
His credo is that ''sometimes the best fund is no fund at all.''

Hendrickson, who has a PhD in biochemistry, sells load funds from
Edmonton and publishes an insightful newsletter, Market Trend
Follower. He believes funds are better market-timing vehicles than
securities held directly because of the instant diversification funds
provide, the ability to switch at little or no cost, the lower risk
that comes with picking multiple fund managers, and the fact funds
provide exposure to more than 25 different sectors....Hendrickson uses
a momentum strategy to move in and out of major sectors. His approach
resembles technical analysis as applied to stock charting, but is
applied instead to mutual funds.


National Post 
August 28, 1999 

The case for market timing: Many fund managers go short term despite long-term hype

Market timing generally gets a bad rap with financial advisors and
mutual fund salespeople. In theory, the pot of gold at the end of the
market-timing rainbow is found by selling stocks or equity funds near
a market top, remaining in cash in a bear market and reinvesting the
cash in stocks and equity funds at the end of the bear market, before
the next bull roars.

In the real world, this is impossible, many investment professionals
insist. That's because market timing requires getting two decisions
right: when to get out of the market and when to get back in
again..But once a bear market actually sets in, it can be a disaster
to ride it to the bottom. The case for market timing is made in a just
published book called Timing the Stock Market: When to Buy, Sell, and
Sell Short, by Colin Alexander...


Investment News

March 27, 2000

For funds, it's a case of 'Let the good timers roll'; Market-timing
woes pull a vanishing act

Some mutual fund companies that had been concerned about market timers
wreaking havoc on their portfolios are seeing fewer problems two years
after fair-practice guidelines were established...The guidelines were
established by the Society of Asset Allocators and Fund Timers, or
Saafti, after mutual fund companies complained that market timers were
disrupting funds by making excessive transactions, thus increasing
costs for long-term investors.

The organization's policy includes clearing timer investments with the
fund beforehand, limiting to 5% the amount of a fund's assets that one
timer can control, and when possible, giving funds advance notice of
withdrawals. "Timing really hasn't been an issue here. We're not sure
if it has anything to do with the fair-practices policy of Saafti or
not," says a spokeswoman for Strong Capital Management, which manages
$25 billion. That's a far cry from Strong's stance two years ago, when
the Menomonee Falls, Wis., firm was an outspoken opponent of market
timing...even with the guidelines, moving money out of funds and
stocks when performance drops can still hurt specific funds..."Right
now it's not a systemic problem, but it can be harmful to a specific
fund and the wealth of its other shareholders," says Burton Greenwald,
a mutual fund consultant in Philadelphia. "Any fund worth its salt
would be against timing."


HedgeWorld Daily News

August 9, 2000
New Sapourn Fund of Funds Uses Mutual-Fund Timing Strategy

One of the best-kept secrets of hedge fund investing is mutual-fund
timing, according to manager Michael Sapourn who in July launched a
fund of funds employing that strategy....The fund of funds is the
first for Sapourn, which has been running single-manager
mutual-fund-timing products since 1997 ...It's a strategy that really
hasn't been on the radar screen for many institutional investors, but
they are definitely starting to take notice, Mr. Sapourn said.

With mutual-fund timing, a hedge fund manager is typically either 100%
invested or fully in cash....Generally, with mutual-fund market
timing, you're either in the market or you're out, Mr. Sapourn
said...The directional strategy relies on market momentum and managers
are in a position to make money regardless of whether the market is
climbing or falling.

...even investors who normally don't care to use complex derivative
instruments in their portfolio like that the strategy deals in
exchange-listed public securities....Despite their strong performance,
managers of mutual-fund timing hedge funds have kept a low profile.
That's because hedge fund managers want to avoid drawing the ire of
mutual fund companies that don't like to see what they view as
disruptive inflows and outflows of capital by hedgers.


Investment News

April 16, 2001

Volatility sparks new look at market timing; New program gives
planners access to timing strategies

Market timing for the masses - that is the general concept behind a
program , to debut as early as this week, that will give financial
advisers access to a screened universe of market-timing
strategies...Schreiner Capital Management in New York is launching the
Select Advisors program, which packages nearly 500 market-timing
strategies from 230 active mutual fund traders in a unique, wraplike
format...Roger Schreiner, president of Schreiner Capital and
co-founder of Select Advisors, says the program, which completely
rebuffs any notion of buy-and-hold investing, gives advisers a tool
for investing regardless of market conditions.

...the concept will enable financial planners to allocate client
assets with advisers that actively trade mutual funds using a variety
of market-timing strategies...Select Advisors will offer exposure in
such strategies as short-selling, leveraged long-selling and bonds
through active allocators with turnover rates that could range from
200% to 2,000% annually. Clients pay a 2.5% asset-based fee, of which
1% goes to the adviser bringing the assets to the program...Mr.
Schreiner, a longtime member of the Society of Asset Allocators and
Fund Timers Inc., is from the school that boldly challenges the notion
of buy-and-hold investing...As an adviser with $125 million under
supervision and first-quarter 2001 performance in excess of 30%, Mr.
Schreiner believes market timing is the most responsible way to
oversee a client's portfolio.

''Passive investing doesn't work,'' he says, taking a shot at some of
the mutual fund industry's proudest sons. ''What the Peter Lynches and
John Bogles of the world are telling you is not true. I don't think
buy-and-hold investing is good for any point in time. I think passive
investing is a guarantee that you're going to get hurt.''..In the
Select Advisors model, the underlying managers that will trade mutual
funds in a handful of fund companies which allow and encourage such
activity will do all the timing. The fund companies will primarily
include Rydex, ProFunds and Potomac, but the idea is to expand to more
exotic instruments that will include some individual securities...


Pensions and Investments

January 6, 2003

Volatility equals opportunity: DC participants timing global
investments; A little bit has big impact on funds' performance,
transaction costs

Some sophisticated defined contribution plan participants, and some
retail investors, are using global equity and bond funds to time the
markets...Even though the number of investors doing so is relatively
small, their efforts are complicating the lives of mutual fund
managers and increasing costs for other investors...The investors are
using market information published after foreign markets have closed,
and the different closing times of the markets around the world, to
time their buy and sell decisions.

For example, if U.S. equity prices fall after the foreign exchanges
close, investors may anticipate foreign markets will follow and can
make a tidy profit by selling their international mutual fund shares
in the U.S. market before the fund's share prices fully adjust...If
the U.S. market rises after foreign markets close, investors could buy
more international fund shares, anticipating that stock prices in
foreign markets will also rise when those markets open and taking
advantage of the fact the fund share prices will not yet reflect that
anticipated rise.

A large percentage of total fund assets do not have to be moved in and
out quickly to wreak havoc on mutual funds, said Ananth Madhavan,
managing director in charge of research for ITG Inc., a New York-based
equity trading service...At the Oregon Investment Council, Salem,
officials discovered that market timing by investors in one of the
international index funds in the state's $530 million 457 plan created
a tracking error of more than 150 basis points for the index fund,
said Linda Haglund, Oregon's deputy state treasurer...The fund,
Barclay Global Investors' MSCI EAFE Index Fund, was one of four
comprising the plan's international investment option.

Effective Dec. 30, the plan closed that portion of the multimanager
fund and distributed BGI's $17.5 million in assets equally among the
remaining money managers...''It's a market problem in that there is a
different (market) closing cycle because of our time zone,'' Ms.
Haglund explained. ''As a result of that, investors across the board
are starting to look at the movement in one market, and playing that
off the future close of the other market.''


AFX News 
July 11, 2003 

Prepare for a 'nasty correction,' says Norman Fosback 

Veteran newsletter editor Norman Fosback is probably best known as the
founding editor in chief of the now defunct Mutual Funds Magazine, but
it was his classic text, "Stock Market Logic," that brought his
research to serious investors...In 1971, he teamed with partner Glen
King Parker to form the Institute for Econometric Research, where he
researched and refined his mutual fund rating and timing systems. This
led to the launch of nine successful investment newsletters, including
the very popular Mutual Fund Forecaster.


Again, let me know if there is anything more I can do for you here.


P.S.  I'm still working on the books!

P.P.S  Markj-ga -- Thanks...anything you can add would be much
appreciated, I'm sure.

search strategy:  searched several full-text article databases for
articles on [ mutual fund timing ] dated earlier than September 2003.

Clarification of Answer by pafalafa-ga on 16 Jul 2004 19:34 PDT
One more that definitely seemed to belong on the list:

Mutual Fund Market News

February 18, 2002

Vanguard to Market Timers: Not Here!

The Vanguard Group has, once again, put its foot down with market
timers. The second largest fund group will begin imposing new, more
restrictive measures aimed at further limiting market timing activity
within the fund complex...In a recent regulatory filing, Vanguard
warns investors that starting March 18 it will implement new exchange
limitations on all funds and for all types of shareholder accounts.
That includes IRAs and 401(k) plans.

While Vanguard is imposing one set of restrictions for its index and
international funds, and a second set of limitations for all of its
other funds, the message to market timers is crystal clear: If you
want to time the market, find a different fund group...

For all index and international funds, Vanguard will impose a new 2:30
p.m. EST cut-off, after which no exchange requests in or out of a fund
will be honored...Currently, Vanguard permits exchanges until markets
close at 4:00 p.m. EST...The new policy applies to all exchange
requests that are made via telephone or the Web. On days when the
stock exchanges close earlier than 4:00 p.m., Vanguard will impose an
exchange privilege blackout period that begins an hour and a half
prior to the market's close.

In the past, Vanguard has been a vocal opponent of market timing
within its mutual funds and, on occasion, has been known to kick
frequent traders out of its funds...But not everyone
agrees....Vanguard is essentially drawing a line in the sand, said
Paul Schatz, chief investment officer of Beneficial Capital in
Woodbridge, Conn., and chairman of the Society of Asset Allocators and
Fund Timers, Inc. (SAAFTI), an association of active money managers
who frequently reallocate clients' assets among funds. "The blackout
period is completely arbitrary and unfounded and will prevent people
from moving their money at will," Schatz said.
sl7-ga rated this answer:5 out of 5 stars and gave an additional tip of: $50.00
Thank you for an excellent answer.

Subject: Re: Specific request for additional research by pafalafa-ga.
From: markj-ga on 16 Jul 2004 10:15 PDT
s17 --

This is just to let you know that I have also found (so far) four
pre-September 2003 articles (plus one academic study) focusing on the
subject of market timing and mutual funds.  One is from a mass-market
financial magazine, one from a major newspaper and two are from
specialized financial periodicals. Like those of pafalafa-ge, they are
copyright-protect and can only legally be summarized and excerpted.

If these are not included in pafalafa-ga's aupplementary research, I
would be happy to provide them to you at the appopriate time.

Subject: Re: Specific request for additional research by pafalafa-ga.
From: markj-ga on 17 Jul 2004 07:34 PDT
s17 --

When I was looking into your question, I focused on looking for
pre-September 2003 articles that dealt largely or exclusively with the
subject of market timing strategies employed by fund investors -- not
by fund managers.

I didn't find many (although I stopped looking when others posted
answers to your questions) because the conventional wisdom used to be
that mutual fund investing was not suitable for market timing
strategies because the "net asset values" of funds are priced only
once a day.  This feature of mutual funds, of course, makes market
timing of fund share sales and purchases even riskier than market
timing of individual stock transactions.

Those that I did find, though, indicated that the "late trading"
market timing arbitrage strategy that began interesting the regulators
in late 2003 was in fact going on and publicized well before that
regulatory interest began.

As I said in my earlier comment, I can?t post the text of the
articles, or links to them, because of copyright restrictions,  but
here are complete cites and brief excerpts that will give you their

1.  "Time Zone Traders," Money Magazine, Vol. 31, Issue 12 (November
1, 2002), by Jason Zweig.

Excerpt (lead paragraph):

"Some folks are gaming discrepancies in mutual fund pricing, much to
the detriment of fundholders. Mutual funds--even those that invest in
foreign markets--price their shares at 4 p.m., New York time. By then,
markets in places like Japan, Hong Kong, Singapore and Australia have
long since closed and won't reopen for another 10 to 12 hours. So the
net asset values of U.S.-based international funds are "stale"--they
don't reflect the current afternoon's market moves in New York. More
often than not, foreign markets follow the U.S. lead. Thus, knowing
that stocks are about to close way up or way down in New York--when
traders overseas can't yet act on that information--is like knowing
tomorrow's news today."

2.  Toronto Globe and Mail (March 30, 2001):


"It's the long-term unitholders who foot the bill for the increased
transaction costs spurred by this frequent fund trading, getting
stiffed with unwanted taxable capital gains distributions as well.
They're also the ones who get clipped on overseas funds, where
unscrupulous unitholders have been known to exploit time-zone
differences. Many international funds have traditionally used the
closing prices in local bourses to arrive at a net asset value, making
the price somewhat stale by the daily deadline for purchasing the
fund. Partly because of this pricing practice, some day traders use
the S&P 500 in the United States as an indicator of how international
funds will likely perform the next day, buying or selling

3.  "A Distinct Chill Has Descended On Market Timing Relationships,"
National Underwriter & Health Services Journal, by Joan Boros (August
6, 2001).


"The ill effects of market timing are felt most by international
funds. That's because market timers have been engaging in what is
known as "time zone arbitrage." Here, the timers bet, with some degree
of success, that overseas markets will respond favorably to a rise in
markets in the United States. The timers buy a mutual fund that
invests in foreign stocks, expecting those stock prices will rise
based on an upswing in the U.S. markets. They also dispose of the
funds in anticipation of a downturn in the foreign markets and related
stocks the fund holds."

4. "Day Trading International Mutual Funds: Evidence and Policy
Solutions." William N Goetzmann; Zoran Ivkovic; K Geert Rouwenhorst,
Journal of Financial & Quantitative Analysis,Volume 36, Issue 3
(September 1, 2001)

Excerpt (Abstract):
"Daily pricing of mutual funds provides liquidity to investors but is
subject to valuation errors due to the inability to observe
synchronous, fair security prices at the end of the trading day. This
may hurt fund investors if speculators strategically seek to exploit
mispricing or if the net flow of money into funds is correlated with
these pricing errors. We show that mutual funds are exposed to
speculative traders by using a simple day trading rule that yields
large profits in a sample of 391 U.S.-based open-end international
mutual funds. We propose a simple "fair pricing" mechanism that
alleviates these concerns by correcting net asset values for stale
prices. We argue that fund companies and regulators should look at
alternatives that allow funds to offer fair pricing to investors,
which, in turn, decreases the need to resort to monitoring for day
traders and redemption penalties."

5.  Financial Times, by Alison Beard (March 8, 2001):


"Arbitrageurs who make more than $1bn a year day-trading international
mutual funds and playing on the time difference between US and Asian
markets may see their livelihood slip away.  .  .  .
Mr Forrester would not give figures for the Putnam funds, but a study
by three professors at Yale University's School of Management
estimates that market timers make more than $1.1bn a year from
inefficiently priced international mutual funds."

I hope that these examples provide some usefully focused additional
information for your project.

Subject: Re: Specific request for additional research by pafalafa-ga.
From: pafalafa-ga on 22 Jul 2004 17:38 PDT
As I've said elsewhere....Thanks!  It's been a treat working with you.

By the way, I mentioned on another question a legal case you should
look over, if you haven't already:$FILE/borneman%207-25-03.pdf

It's an awfully good explanation of some of the nuts and bolts of market timing.  



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