Mutual Fund Investment Style Consistency and Risk-adjusted Performance

Authors

  • Justus Loick

DOI:

https://doi.org/10.26481/marble.2017.v2.408

Keywords:

Investment Style Consistency

Abstract

While it is commonly agreed on that a mutual fund´s investment style influences its returns to investors, academia has not fully explored the relationship between a mutual fund´s consistency with its stated investment style and risk-adjusted performance. The study at hand employs a novel consistency ratio by means of the return-based style analysis for U.S. equity mutual funds to investigate that relationship. Based on their consistency scores, mutual funds are subsequently divided into quintiles and compared for their risk-adjusted performance. Evidence is found that investment style consistency does influence risk-adjusted returns and that the financial crisis had a major impact on that relation. While a convex curve describes the relationship between style consistency and fund performance before the financial crisis, it reversed into a concave curve afterwards. This study contributes to current research by going beyond a linear relationship between mutual fund investment style consistency and risk-adjusted performance, commonly assumed in prior studies.

References

Asness, C. S., Friedman, J. A., Krail, R. J., & Li. (2000). Style timing: Value versus growth. The Journal of Portfolio Management, 26(3), 50-60.

Banz, R. W. (1981). The Relationship Between Return and Market Value of Common Stocks. Journal of Financial Economics, 9, 3-18.

Barberis, N., & Shleifer, A. (2003). Style investing. Journal of Financial Economics, 68(2), 161-199.

Baron, R. M., & Kenny, D. A. (1986). The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51, 1173-1182.

Barry, C. B., & Brown, S. J. (1984). Differential information and the small firm effect. Journal of Financial Economics, 13(2), 283-294.

Berk, J., & DeMarzo, P. (2007). Corporate Finance. Pearson Education.

Bollen, N. P., & Busse, J. A. (2001). On the timing ability of mutual fund managers. The Journal of Finance, 56(3), 1075-1094.

Brown, K. C., Van Harlow, W., & Zhang, H. (2009). Staying the course: The role of investment style consistency in the performance of mutual funds.

Carhart, M. M. (1997). On persistence in mutual fund performance. The Journal of finance, 52(1), 57-82.

CRSP. (2016). Fund Fees “FUND_FEES”. Retrieved June 15, 2016, from CRSP - Center for Research and Security Prices: http://www.crsp.com/products/documentation/fund-fees-%E2%80%9Cfundfees%E2%80%9D

CRSP. (2016). Lipper Objective and Classification Codes. Retrieved May 09, 2016, from CRSP - Center for Research and Security Prices: http://www.crsp.com/products/documentation/lipper-objective-and-classification-codes

Daniel, K., Grinblatt, M., Titman, S., & Wermers, R. (1997). Measuring mutual fund performance with characteristic‐based benchmarks. The Journal of finance, 57(3), 1035-1058.

Dor, A. B., & Jagannathan, R. (2002). Understanding mutual fund and hedge fund styles using return based style analysis. National Bureau of Economic Research.

Fama, E. F., & French, K. R. (1992). The cross‐section of expected stock returns. The Journal of Finance, 47(2), 427-465.

French, K. R., & Fama, E. F. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33, 3-56.

French, K. R., & Fama, E. F. (1995). Size and book-to-market factors in earnings and returns. Journal of Finance, 50, 131-155.

Froot, K., & Teo, M. (2008). Style investing and institutional investors. Journal of Financial and Quantitative Analysis, 43(4), 883-906.

Grossman, S., Sanford, J., & Stiglitz, J. E. (1980). On the impossibility of informationally efficient markets. The American economic review, 70(3), 393-408.

Huang, J., Sialm, C., & Zhang, H. (2011). Risk shifting and mutual fund performance. Review of Financial Studies, 24(8), 2575-2616.

Jiang, G. J., Yao, T., & Yu, T. (2007). Do mutual funds time the market? Evidence from portfolio holdings. Journal of Financial Economics, 86(3), 724-758.

Lai, K. S., & Lai, M. (1991). A cointegration test for market efficiency. Journal of Futures Markets, 11(5), 567-575.

Levis, M., & Liodakis, M. (1999). The profitability of style rotation strategies in the United Kingdom. The Journal of Portfolio Management, 26(1), 73-86.

Reinganum, M. R., & Smith, J. K. (1983). Investor preference for large firms: new evidence on economies of size. The Journal of Industrial Economics, 213-227.

Shukla, R., Kim, M., & Tomas, M. (2000). Mutual fund objective misclassification. Journal of Economics and Business, 52(4), 309-323.

Wermers, R. (2012). Matter of style: The causes and consequences of style drift in institutional portfolios.

White, H. (2000). A reality check for data snooping. Econometrica, 68(5), 1097-1126.

Zhao, Y. (2009). "Does mutual fund investment style consistency affect the performance of mutual funds?: evidence from Chinese mutual funds.".

Downloads

Additional Files

Published

2017-02-21