Style rotation and performance persistence of mutual funds
AbstractMost academic studies on performance persistence in monthly mutual fund returns do not find evidence for timing skills of fund managers. Furthermore, realized returns are undoubtedly driven by the investment style of a fund. We propose a new holdings-based measure of style rotation to investigate the relation between performance persistence and changes in style. For a large sample of U.S. domestic equity mutual funds we find that top and bottom performing decile portfolios, sorted on past one-year returns and risk djusted excess performance from a 4-factor model, are subject to a higher degree of style rotation than middle deciles. Style inconsistent funds with high values for the style rotation measure in turn exhibit less persistence in decile rankings over subsequent years than style consistent funds. Hence, it is important for delegated portfolio management to consider style rotation when selecting managers based on past performance.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2008072.
Date of creation: 01 Dec 2008
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mutual fund; performance persistence; style rotation.;
Find related papers by JEL classification:
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
- G20 - Financial Economics - - Financial Institutions and Services - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-05 (All new papers)
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