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Style Drift: Evidence from Small-Cap Mutual Funds

53 Pages Posted: 11 Mar 2016 Last revised: 28 Mar 2017

Charles Cao

Pennsylvania State University

Peter Iliev

Pennsylvania State University - Department of Finance

Raisa Velthuis

Villanova University - Department of Finance

Date Written: January 17, 2017

Abstract

This paper documents that small-cap mutual funds allocate on average 27% of their portfolio to mid- and large-cap stocks. We find that larger and older small-cap funds are more likely to hold mid- and large-cap stocks, consistent with funds straying from their objective over time. Funds that invest heavily in mid- and large-cap stocks expose their investors to unanticipated risks but investors do not experience higher abnormal returns or performance persistence overall. These funds did outperform their peers by 3% annually in the most recent period between January 2003 and March 2010.

Keywords: Mutual Funds; Small-Cap; Investment Objectives; Style Drift

JEL Classification: G23; G11

Suggested Citation

Cao, Charles and Iliev, Peter and Velthuis, Raisa, Style Drift: Evidence from Small-Cap Mutual Funds (January 17, 2017). Journal of Banking & Finance, Vol. 78, 42-57 (May 2017). Available at SSRN: https://ssrn.com/abstract=2745510

Charles Cao

Pennsylvania State University ( email )

Department of Finance
Smeal College of Business
University Park, PA 16802
United States
814-865-7891 (Phone)
814-865-3362 (Fax)

HOME PAGE: http://www.personal.psu.edu/qxc2/cao.html

Peter Iliev (Contact Author)

Pennsylvania State University - Department of Finance ( email )

348 Business Building
University Park, PA 16802
United States

Raisa Velthuis

Villanova University - Department of Finance ( email )

United States

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