Dressing for Style in the Mutual Fund Industry
40 Pages Posted: 26 Mar 2016
Date Written: March 24, 2016
We define benchmark drift based on changes in a fund's beta relative to its self-promoted benchmark, calculated from the portfolio holdings of both the fund and benchmark. Benchmark drift has a strong adverse impact on mutual fund flows, even when funds beat the benchmark. Moreover, controlling benchmark drift plays a larger role in portfolio risk management than tournament-style behavior. Both external and internal governance mechanisms work to control benchmark drift: funds with greater institutional investment and those in larger fund families demonstrate less benchmark drift and take stronger steps to reduce it once it occurs.
Keywords: Mutual funds, Style drift, Mutual fund style
JEL Classification: G23
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