Mutual Fund Investment Style Consistency and Risk-adjusted Performance

Abstract

While it is commonly agreed on that a mutual fund´s investment style influences its returns to investors, academia has not fully explored the relationship between a mutual fund´s consistency with its stated investment style and risk-adjusted performance. The study at hand employs a novel consistency ratio by means of the return-based style analysis for U.S. equity mutual funds to investigate that relationship. Based on their consistency scores, mutual funds are subsequently divided into quintiles and compared for their risk-adjusted performance. Evidence is found that investment style consistency does influence risk-adjusted returns and that the financial crisis had a major impact on that relation. While a convex curve describes the relationship between style consistency and fund performance before the financial crisis, it reversed into a concave curve afterwards. This study contributes to current research by going beyond a linear relationship between mutual fund investment style consistency and risk-adjusted performance, commonly assumed in prior studies.