Why fund style drift persists: endogenous incentives and exogenous imitation

Using Chinese mutual fund data, this paper documents that fund style drift is recurrent, persistent over time, and relatively widespread. We show that style drift exhibits endogenous persistence: When prior style drift generates higher short-term returns, the likelihood of continued style drift in the subsequent period increases. This pattern is consistent with a dynamic, performance-based behavioral reinforcement mechanism, which is more pronounced in single-manager funds. In addition, we provide direct evidence of imitation and persistence in style drift within the fund family and show that the information spillover through cross-holdings represents a plausible channel underlying exogenous imitation. Such imitation is more likely to occur in less competitive fund companies. Overall, our findings offer a new explanation for the persistence of style drift and complement the existing literature.