Investment Style Volatility and
Mutual Fund Performance
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. We develop a holdings-based
statistic to measure the volatility of a fund’s style characteristic profile
over time and demonstrate that, on average, funds with lower levels of style
volatility significantly outperform more style-volatile funds on a
risk-adjusted basis. We also show that
style volatility has a distinct impact on future fund performance compared to
fund expenses or past risk-adjusted returns and document that the level of
unintentional style volatility is the primary determinant of the overall
effect. We conclude that deciding to
maintain a less volatile investment style is an important aspect of the
portfolio management process.
Download this paper (PDF
format)
Return
to Keith Brown’s Working Paper Page