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Mutual fund styles

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  • Brown, Stephen J.
  • Goetzmann, William N.

Abstract

In this paper, we find that existing classifications do a poor job at forecasting differences in future performance. We propose a different method for grouping mutual funds which is relatively impervious to strategic "gaming" of benchmarks. In particular, it captures active portfolio management strategies, rather than relying upon the fund composition observed at specific points in time. As a result of our classification, we find that equity fund managers broadly fall into some familiar and not-so-familiarpatterns of behavior. The familiar patterns include "Small-Cap", "Growth", "Growth and Income", "Income" and "International" styles. The unfamiliar styles resemble "Timers," "Value" and "Glamour" managers. This new categorization does a superior job at forecasting future differences in mutual fund performance, and reveals something about the aggregate behavior of mutual fund managers as well. In addition, we find some preliminary evidence that funds which changed their self-reported classification improved their position relative to their new benchmark.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 43 (1997)
Issue (Month): 3 (March)
Pages: 373-399

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Handle: RePEc:eee:jfinec:v:43:y:1997:i:3:p:373-399

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Web page: http://www.elsevier.com/locate/inca/505576

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  1. Dybvig, Philip H & Ross, Stephen A, 1985. " The Analytics of Performance Measurement Using a Security Market Line," Journal of Finance, American Finance Association, vol. 40(2), pages 401-16, June.
  2. Bruce N. Lehmann & David M. Modest, 1985. "Mutual Fund Performance Evaluation: A Comparison of Benchmarks and Benchmark Comparisons," NBER Working Papers 1721, National Bureau of Economic Research, Inc.
  3. Grinblatt, Mark & Titman, Sheridan D, 1989. "Mutual Fund Performance: An Analysis of Quarterly Portfolio Holdings," The Journal of Business, University of Chicago Press, vol. 62(3), pages 393-416, July.
  4. William N. Goetzmann & Susan M. Wachter, 1998. "Clustering Methods for Real Estate Portfolios," Yale School of Management Working Papers, Yale School of Management ysm59, Yale School of Management.
  5. Michael C. Jensen, 1968. "The Performance Of Mutual Funds In The Period 1945–1964," Journal of Finance, American Finance Association, vol. 23(2), pages 389-416, 05.
  6. Lakonishok, Josef, et al, 1991. "Window Dressing by Pension Fund Managers," American Economic Review, American Economic Association, vol. 81(2), pages 227-31, May.
  7. Grinblatt, Mark & Titman, Sheridan, 1993. "Performance Measurement without Benchmarks: An Examination of Mutual Fund Returns," The Journal of Business, University of Chicago Press, vol. 66(1), pages 47-68, January.
  8. Ferson, Wayne E & Schadt, Rudi W, 1996. " Measuring Fund Strategy and Performance in Changing Economic Conditions," Journal of Finance, American Finance Association, vol. 51(2), pages 425-61, June.
  9. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  10. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
  11. Brown, Stephen J, 1989. " The Number of Factors in Security Returns," Journal of Finance, American Finance Association, vol. 44(5), pages 1247-62, December.
  12. Abraham, Jesse M. & Goetzmann, William N. & Wachter, Susan M., 1994. "Homogeneous Groupings of Metropolitan Housing Markets," Journal of Housing Economics, Elsevier, Elsevier, vol. 3(3), pages 186-206, September.
  13. Connor, Gregory & Korajczyk, Robert A., 1986. "Performance measurement with the arbitrage pricing theory : A new framework for analysis," Journal of Financial Economics, Elsevier, Elsevier, vol. 15(3), pages 373-394, March.
  14. Elton, Edwin J, et al, 1993. "Efficiency with Costly Information: A Reinterpretation of Evidence from Managed Portfolios," Review of Financial Studies, Society for Financial Studies, vol. 6(1), pages 1-22.
  15. William N. Goetzmann & Stephen J. Brown, 2005. "Performance Persistence," Yale School of Management Working Papers, Yale School of Management ysm451, Yale School of Management.
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