Active Timing Decisions of Equity Mutual Funds

In this paper we examine an aspect ofprofessional investment management which has not been adequately documented and studied; the extent to which equity mutualfund managers actively adjust their portfolio’s equity risk evosure over time. Estimates of a portfolio’s quarter-end beta are developed using the actual stock ho~~gs oft~~~ol~ at the quarter-end. Changes in these beta estimates fivm one quarter to the next are shown to arise frtm both passive and active asset allocation. We find that active risk adjust~nt domi~~s~ssive rebalancing and that equity risk exposunz is quite variable over time. Thus, individual investors who estimate the equity risk inherent in a portfolio bused 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 LIS anticipatory offuture market events or reactive to past market events.