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Mutual Fund Styles

  • William N. Goetzmann

    ()

    (Yale University, School of Management)

  • Stephen J. Brown

    ()

    (Department of Finance)

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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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number ysm40.

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Date of creation: 10 Oct 1998
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Handle: RePEc:ysm:somwrk:ysm40
Contact details of provider: Web page: http://icf.som.yale.edu/

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  1. 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.
  2. 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.
  3. Josef Lakonishok & Andrei Shleifer & Richard Thaler & Robert Vishny, 1991. "Window Dressing by Pension Fund Managers," NBER Working Papers 3617, National Bureau of Economic Research, Inc.
  4. Abraham, Jesse M. & Goetzmann, William N. & Wachter, Susan M., 1994. "Homogeneous Groupings of Metropolitan Housing Markets," Journal of Housing Economics, Elsevier, vol. 3(3), pages 186-206, September.
  5. 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.
  6. 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.
  7. Brown, Stephen J & Goetzmann, William N, 1995. " Performance Persistence," Journal of Finance, American Finance Association, vol. 50(2), pages 679-98, June.
  8. William N. Goetzmann & Susan M. Wachter, 1998. "Clustering Methods for Real Estate Portfolios," Yale School of Management Working Papers ysm59, Yale School of Management.
  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. 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.
  11. Connor, Gregory & Korajczyk, Robert A., 1986. "Performance measurement with the arbitrage pricing theory : A new framework for analysis," Journal of Financial Economics, Elsevier, vol. 15(3), pages 373-394, March.
  12. 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.
  13. Brown, Stephen J, 1989. " The Number of Factors in Security Returns," Journal of Finance, American Finance Association, vol. 44(5), pages 1247-62, December.
  14. 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.
  15. 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.
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