1. Investment Style Consistency and Risk-Adjusted Performance
School of Business and Economics
Investment Style Consistency and Risk-Adjusted Performance
Name: Justus Loick
Results
Firstly, the data analysis revealed statistics about the proportions of style-consistent mutual funds.
The second part separated funds into quintiles based on their consistency score. Then, risk-adjusted performance scores were compared for the first (very inconsistent), third and fifth (very consistent) quintile.
Overall, inversed U-shaped curve
Third quintile only rarely performed worst and was best-performing group in largest category (large-blend funds)
Fifth quintile slightly better than first uintile
Overall, U-shaped curve
Third quintile performed worse in four out of nine individual categories
Fifth quintile slightly better than first quintile
Introduction
“Investment style matters, and it matters a lot.”
(Brown, 2015)
People entrust their money to fund managers to achieve better investment returns than they could do with their own resources. Generally, investors want their trustees to follow the promised investment style in order to manage the risk and return profile of their own aggregate portfolio. But can they also benefit from fund managers engaging in style drifts if those consider it as appropriate with their profound market knowledge?
Potential relationship of style consistency and fund performance:
+ Fewer transaction costs
+ Less likelihood of asset misallocation
− Neglecting upside potential of timey style-rotations
Table 1: Percentage of inconsistent mutual funds ( )
Table 1: Percentage of inconsistent mutual funds ( )
Figure 1: Heatmap of style-specific Russell indices
1. Q
3. Q
5. Q
1. Q
3. Q
5. Q
Research question
“What is the relationship between mutual funds´ investment style consistency and the future risk-adjusted performance before and after the financial crisis?”
Conclusion Discussion
Very style-consistent mut funds show slightly higher returns than very style-inconsistent funds
Even if superior stock picking skills existent, benefits outweighted by higher transaction costs and expense ratios
Third quintile = mutual funds which mostly follow the stated investment style and partly allow investment strategy to drift
Third quintile performs best pre-financial crisis
Likely to have chosen few “hot” stocks with relatively low expense ratio
Third quintile perfrms worse post-financial crisis
No superior selective stock-picking skills and high expense ratio
METHODOLOGY
The data set consists of U.S. equity-focused mutual funds and was split into a pre and post financial crisis period.
The data analysis part consists of two steps:
To get a measure for investment style consistency (with return-based style analysis)
Establish the relationship between style consistency and risk-adjusted performance (measured by alpha).
References
Barberis, N., & Shleifer, A. (2003). Style investing. Journal of Financial Economics, 68(2),
Brown, K. C., Van Harlow, W., & Zhang, H. (2009). Staying the course: The role of investment style consistency in the performance of mutual funds.
Fama, E. F., & French, K. R. (1992). The cross‐section of expected stock returns. The Journal of Finance, 47(2),
Jiang, G. J., Yao, T., & Yu, T. (2007). Do mutual funds time the market? Evidence from portfolio holdings. Journal of Financial Economics, 86(3),
Correspondence to: Ehsan Ramezanifar, Finance Department
Maastricht University P.O. Box MD Maastricht, The Netherlands