Abstract
This study uses an easy and accessible method which is termed selectivity to predict the active management in a mutual fund’s performance. Selectivity that is R2 obtained from the regression of fund’s return. This study defines R2 is the proportion of the fund return variance that is explained by the variation in these factors; thus, lower R2 means that the fund tracks them less closely. Selectivity is thus measured by 1−R2, the proportion of the fund’s variance that is due to idiosyncratic risk or multifactor tracking error performance. If selectivity enhances mutual fund performance, it should be negatively related to R2. Empirical studies identify an R2-based strategy that earns a significantly positive risk-adjusted excess return. Also existing studies of mutual fund market timing use model analyzing monthly returns and find little evidence of timing ability. This study processes the data of mutual fund’s composition to analyze whether market timing of mutual fund is significant or not, and test the correlation of alpha and R2.