Market timing and unit trusts: Can you beat the market?

Abstract

The article reports the results of an investigation into the level of predictive accuracy required to benefit from a market-timing strategy using unit trusts as the investment medium. Three unit trusts within the same management company were used as the assets between which a market timer could switch his or her investment. Switching would depend on the timer's forecast of which of the three investments would produce the best returns in the forthcoming period. Remaining within the family of trusts managed by a single company kept the transaction costs to a minimum. Investments could be made in a general equity, a resources or an income unit trust. As attractive as the potential returns from market timing within a family of unit trusts might appear to be, the levels of predictive accuracy required to beat a buy-and-hold strategy with certainty were found to be extremely high (of the order of 80%). In addition, much of the benefit from timing depends on being in the highest yielding asset for a small, but specific number of periods. Therefore not only does one require a high level of predictive accuracy, but it is important to be correct in the key periods when most of the return above the buy-and-hold is earned.