Fund managers aren't bad at picking stocks, but they're terrible at this

When fund managers justify their fees, they point to two core competencies: identifying undervalued stocks and timing market cycles. New research examining more than 21,000 funds across 35 countries reveals that fund managers aren't too bad at one of them but are terrible at the other.

A comprehensive new study examining has delivered a nuanced verdict on fund manager skill that challenges conventional wisdom. The research, conducted by Javier Vidal-García and Marta Vidal, is, by the authors' own account, the largest and most comprehensive global analysis of mutual fund skill ever undertaken.

The scope of the investigation

The study analysed 21,671 actively managed equity mutual funds spanning 35 countries from 1990 to 2024. This isn't just another US-centric piece of research. The dataset includes funds from North America, Europe, Asia-Pacific, and emerging markets, covering everything from established markets like the UK and Germany to developing economies such as Brazil and Indonesia.

What makes this research particularly robust is its use of daily rather than monthly returns. This approach, as recent European studies have shown, significantly increases the statistical power of performance measurements. The researchers also addressed survivorship bias by including funds that closed during the study period, ensuring their sample wasn't skewed towards only successful survivors.

Separating skill from luck

To measure fund manager abilities, the researchers employed the Treynor and Mazuy model, a framework developed in 1966 that remains the gold standard for decomposing fund performance. This model separates two distinct skills:

Stock picking ability (alpha): The capacity to identify undervalued securities that will outperform their risk-adjusted benchmarks.

Market timing ability (gamma): The skill to adjust portfolio risk exposure based on market conditions, increasing equity weights before market rises and reducing them before declines.

The researchers also tested conditional versions of these models, incorporating public information variables such as dividend yields, term spreads, and short-term interest rates. This allowed them to determine whether fund managers could generate superior returns by skilfully interpreting widely available economic data.

The uncomfortable findings

Fund managers struggle badly with market timing

The results on market timing were unambiguous and damning. Across virtually every country studied, fund managers demonstrated poor market timing ability. The gamma coefficients, which measure timing skill, were negative and statistically significant in nearly all markets.

This means fund managers consistently made the wrong calls about when to increase or decrease their market exposure. Rather than adding value through tactical asset allocation, they systematically subtracted value. Whether managing funds in Sweden (where gamma was particularly negative) or Brazil, fund managers showed a persistent inability to anticipate market movements.

Stock picking results vary significantly by geography

The picture for stock selection was more complex. Fund managers in some countries, particularly emerging markets like India and Brazil, demonstrated positive and statistically significant alpha generation. These managers appeared capable of identifying securities that outperformed their risk-adjusted benchmarks.

However, in developed markets, the results were mixed. Fund managers in countries like Japan and Germany showed negative alphas, suggesting they actually destroyed value through their stock selection process. In many other markets, including major economies, the alphas were either insignificantly different from zero or only marginally positive.

Public information doesn't provide an edge

Perhaps most surprisingly, even when fund managers systematically incorporated publicly available economic data into their decision-making, it didn't help them perform any better than managers who didn't use such analysis.

This finding challenges the notion that professional investors can generate alpha by skilfully interpreting macroeconomic signals such as interest rate movements and dividend yields that are freely available to all market participants.

Building on academic foundations

This research extends a rich tradition of academic inquiry into fund performance. The seminal work of Eugene Fama and Kenneth French showed that very few US fund managers generate statistically significant alpha after accounting for common risk factors. Mark Carhart's research on persistence demonstrated that superior performance rarely continues beyond the short term.

More recent European studies by researchers like Vidal-García and colleagues have used daily data to show that while short-term performance persistence exists, it disappears over longer periods. This new global study confirms these patterns hold true across diverse markets and regulatory environments.

The research also builds on recent work examining market timing abilities during crisis periods, such as studies of hedge fund performance during the 2008 financial crisis. The consistent finding across all these studies is that timing markets successfully is extraordinarily difficult, even for professionals.

Why market timing is so challenging

The poor market timing results shouldn't surprise anyone familiar with the academic literature on market efficiency. Successfully timing markets requires two correct decisions: when to reduce risk and when to increase it again. Getting either decision wrong can be costly.

Fund managers face additional constraints that make timing even more difficult. They must manage cash flows from investors, maintain portfolio diversification requirements, and operate within regulatory frameworks. These operational realities can prevent them from making the rapid, concentrated bets that successful market timing typically requires.

Moreover, the research suggests that even when fund managers correctly interpret economic signals, they're competing against sophisticated institutional investors and algorithmic trading systems that can act on the same information more quickly and efficiently.

What this means for investors

This research has clear implications: be sceptical of fund managers who claim market timing expertise, as the evidence shows they consistently fail at this skill. High fees become harder to justify when timing adds no value and stock selection results are mixed at best, particularly in developed markets.

The fund management industry will continue marketing timing capabilities they demonstrably lack. Investors should focus instead on what the evidence shows: fund managers may occasionally pick stocks well, but they're universally terrible at timing markets.

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