Time-Varying Fund Manager Skill

We propose a new definition of skill as a general cognitive ability to either pick stocks or time the market at different times. We find evidence for stock picking in booms and for market timing in recessions. Moreover, the same fund managers that pick stocks well in expansions also time the market well in recessions. These fund managers significantly outperform other funds and passive benchmarks. Our results suggest a new measure of managerial ability that gives more weight to a fund's market timing in recessions and to a fund's stock picking in booms. The measure displays far more persistence than either market timing or stock picking alone and can predict fund performance.