Trading volume has shrunk, pleasing some and irking others

Money managers who time the market are slowing down.

Many are trading less than ever, in some cases making it hard to distinguish them from the average buy-and-hold investor.

Some managers who used to make 40 trades a year on behalf of their clients now say they are trading no more than 10 times a year.

It’s a situation with implications – good or bad, depending on whom you talk to – for market timers, buy-and-hold investors, mutual fund groups that cater to market timers, and fund groups that have shunned them.

winners

The biggest winners could be mainstream mutual fund companies.

In addition to not having to deal with the additional trading costs incurred by timers making frequent trades within their funds, mutual fund companies that once shunned timers now may find them a suitable source of assets.

At least that’s the impression you get when talking to market timers.

“In the great bull market the funds got picky,” says Paul Schatz, chairman of the Society of Asset Allocators and Fund Timers Inc. in Littleton, Colo. “Now they’re completely sucking wind and coming to us saying maybe we can work out an arrangement.”

Mr. Schatz is a great example of a market timer a fund company might be interested in. He’s the chief investment officer of Beneficial Capital Inc., a money management firm in Woodbridge, Conn., that has $30 million under management. He trades only about once a quarter.

Mutual fund companies say they are not chasing market timers of any stripe.

But one of the most frequently mentioned mainstream fund companies – Janus Capital Corp. in Denver – doesn’t exactly discourage at least a modest amount of trading.

Blair Johnson, a spokesman for the company, says Janus allows four trades per fund, per year – more than enough for an infrequent trader who still may be considered a market timer.

Many other fund companies that say they shun market timers have similar restrictions.

Michael McCarthy, a managing director with MMR McCarthy Market Research LLC in Cambridge, Mass., a money manager with about $100 million, says he uses Janus – along with other mainstream fund companies – because they give him just enough room to time the market.

That’s something of a surprise given that there are funds designed for market timers – Rydex Funds in Rockville, Md., ProFunds in Bethesda, Md., and Potomac Funds in Alexandria, Va.

Mr. McCarthy, however, says their trading costs are too high, especially for a market timer who doesn’t trade frequently.

Those costs are incurred because trades within the mutual funds usually are made in large chunks in a short time to accommodate market timers in the fund who generally move at the same time. As a result, the fund manager doesn’t have the luxury of executing trades over time that would ensure a better price for shareholders.

Using his own trading system, Mr. McCarthy is able to show that the funds set up for timers do not perform as well as other funds. But many market timers aren’t convinced.

Still, if there really is a trend among market timers to make fewer trades, Rydex, ProFunds and Potomac may find themselves losing business to other fund companies.

Gerald Appel, president of Appel Asset Management Corp., a Great Neck, N.Y., money management company, with $120 million under management, that tries to time the market, says that from what he’s seen, there’s no doubt such a trend exists.

“They really have been changing,” Mr. Appel says, referring to the lower frequency at which market timers are trading. “Most timing models just aren’t working as well as they used to. The market used to have a greater tendency, if it was up one day, to be up the next. This tendency has all but vanished, making it harder to follow a [fast] trading system.”

Mr. McCarthy agrees. He now executes just 10 round-trip mutual fund trades a year, versus 40 in 1999 – mostly because of increased market volatility, but also because of the restrictions many mutual fund companies have placed on trading.

dodging volatility

Using a “slower” trading system allows the market to calm down between trades, reducing the risk that an investor will catch wild fluctuations that could wipe out returns, he says.

But if market timers are trading less, what’s the point of using them instead of buy-and-hold managers?

“If you’re placing a restriction on market timers, maybe they’re not timing the market,” says Anthony Vargo, an adviser with Legend Financial Advisors Inc. in Pittsburgh, which has about $150 million under management.

Mr. McCarthy says the reason to use firms like his is simple. Even though he may be trading less, he’s still not a buy-and-hold investor.