Returns Based Style Groups and Benchmarking

Abstract:     
In this study we consider the suitability of two methods of returns based style analysis for classification of investment styles for a single asset class, US Diversified Equity Funds. We extend Sharpe (1992) style Returns Based Style Analysis (RBSA) to form style groups using cluster analysis and introduce a parsimonious Best Fit Index (BFI) of style classification which explicitly acknowledges the existence of market segmentation and practitioner benchmarking. Both methodologies explain a significant proportion of the cross section of out of sample returns, but the BFI method performs better, is more transparent, statistically robust and more closely aligned to investment practice.

Keywords: Mutual funds, Style analysis, Benchmarking, Portfolio Management, Management Style, Returns Based Style, Factor Analysis, Cluster Analysis, Style investing, Comovement, Value, Growth, Investment, Asset management

JEL Classification: C25, C38, C61, G11, G20, G23

working papers series