Staying the Course: Performance Persistence
and the Role of Investment Style Consistency in Professional Asset Management
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 might affect investor returns. Using multivariate techniques for measuring the consistency of a portfolio’s investment mandate, we demonstrate that, on average, more style-consistent funds outperform less style-consistent funds. However, this finding appears to be driven by the performance of style-consistent funds in rising markets; in down markets, less style-consistent funds exhibit relative outperformance. These results are robust with respect to the return-generating model employed and the return measurement period, although they do vary somewhat by fund investment style. We also document a significant relationship between measures of fund style consistency and the persistence of its future performance, net of momentum and past performance effects. We conclude the decision to maintain a consistent investment style is an important aspect of the portfolio management process.
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