Staying the Course: The
Role of Investment Style Consistency in the Performance of Mutual Funds
Keith C. Brown
W. V. Harlow
Hanjiang Zhang
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 holdings-
and returns-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 and method used to measure future returns. We also show that fund style consistency and risk-adjusted
performance persistence 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.
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