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Staying the Course: The Role of Investment Style Consistency in the Performance of Mutual Funds

61 Pages Posted: 30 Mar 2009  

Keith C. Brown

University of Texas at Austin - Department of Finance

W. Van Harlow

Fidelity Investments

Hanjiang Zhang

Nanyang Technological University - Nanyang Business School

Date Written: March 2, 2009

Abstract

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.

Keywords: Style Investing, Style Consistency, Performance Persistence

JEL Classification: G11, G14

Suggested Citation

Brown, Keith C. and Harlow, W. Van and Zhang, Hanjiang, Staying the Course: The Role of Investment Style Consistency in the Performance of Mutual Funds (March 2, 2009). Available at SSRN: https://ssrn.com/abstract=1364737 or http://dx.doi.org/10.2139/ssrn.1364737

Keith C. Brown

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-6520 (Phone)
512-471-5073 (Fax)

W. Van Harlow

Fidelity Investments ( email )

82 Devonshire Street
Boston, MA 02109
United States
617-563-2673 (Phone)
617-476-9762 (Fax)

Hanjiang Zhang (Contact Author)

Nanyang Technological University - Nanyang Business School ( email )

S3-B1A-05 Nanyang Avenue
Singapore, 639798
Singapore

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