Matter of Style: The Causes and Consequences of Style Drift in Institutional Portfolios

35 Pages Posted: 19 Mar 2012  

Russ Wermers

University of Maryland - Robert H. Smith School of Business

Date Written: March 15, 2012

Abstract

The equity style orientation of an institutional portfolio has a large influence on its yearly returns. This paper analyzes the causes and consequences of portfolio "style drift" among U.S. equity mutual funds by developing new portfolio holdings-based measures of drift. These holdings-based measures allow a decomposition of style drift into components that result from active versus passive portfolio decisions by a fund manager in three different equity style dimensions: size, book-to-market, and price momentum. We find that a significant amount of style drift results from active manager trades, therefore, managers that trade more frequently tend to manage portfolios with greater style drift. In addition, managers of growth-oriented funds and small funds, and managers having good stockpicking track records, tend to have higher levels of style drift than other managers; these managers also deliver better future portfolio performance as a result of their trades, even after accounting for their higher trading costs. Consistent with this superior performance, managers do not seem to be concerned with controlling style drift; indeed, managers tend to be "style chasers" during most years, which appears to benefit their performance. Overall, our findings suggest that controlling the style drift of a fund manager does not necessarily result in higher performance for investors.

Keywords: Mutual fund performance, style drift

JEL Classification: G23

Suggested Citation

Wermers, Russ, Matter of Style: The Causes and Consequences of Style Drift in Institutional Portfolios (March 15, 2012). Available at SSRN: https://ssrn.com/abstract=2024259 or http://dx.doi.org/10.2139/ssrn.2024259

Russell R. Wermers (Contact Author)

University of Maryland - Robert H. Smith School of Business ( email )

Department of Finance
College Park, MD 20742-1815
United States
301-405-0572 (Phone)
301-405-0359 (Fax)

HOME PAGE: http://www.rhsmith.umd.edu/finance/rwermers/

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