Abstract

The equity orientation of an institutional portfolio has a large influence on its yearly returns. This paper analyzes the causes and consequences of portfolio style among U.S. equity mutual funds by developing new portfolio holdings-based measures of drift. These holdings-based measures allow a decomposition of drift into components that result from active versus passive portfolio decisions by a fund manager in three different equity dimensions: size, book-to-market, and price momentum. We find that a significant amount of drift results from active manager trades, therefore, managers that trade more frequently tend to manage portfolios with greater drift. In addition, managers of growth-oriented funds and small funds, and managers having good stockpicking track records, tend to have higher levels of drift than other managers; these managers also deliver better future portfolio performance as a result of their trades, even after accounting for their higher trading costs. Consistent with this superior performance, managers do not seem to be concerned with controlling drift; indeed, managers tend to be style chasers during most years, which appears to benefit their performance. Overall, our findings suggest that controlling the drift of a fund manager does not necessarily result in higher performance for investors.

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