Staying the Course: The Role of Investment Style Consistency in the Performance of Mutual Funds
Keith C. Brown
University of Texas at Austin - Department of Finance
W. Van Harlow
Nanyang Technological University - Nanyang Business School
March 2, 2009
While a mutual fund's investment style influences the returns it generates, little is known about how a manager's execution of the style decision affects portfolio performance. Using both returns- and holdings-based techniques to measure the consistency with which managers approach their investment mandates, we demonstrate that, on average, more style-consistent funds significantly outperform less style-consistent funds on a risk-adjusted basis. This result differs from portfolio turnover and expense ratio effects and is robust with respect to the period used to measure future returns. We also show that fund style consistency and the persistence of risk-adjusted performance over time are distinct influences and demonstrate the potential profitability of trading strategies based on their combined impact. We conclude that deciding to maintain a consistent investment style is an important aspect of the portfolio management process.
Number of Pages in PDF File: 61
Keywords: Style Investing, Style Consistency, Performance Persistence
JEL Classification: G11, G14
Date posted: March 30, 2009
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