Style Drift Research Articles

Downward pressure, investment style and performance persistence of institutional investors

This paper explores the capacity of time-varying investment styles to safeguard investors in a capital market burdened by substantial downside risk. Utilizing Covid-19 as a quasi-natural experiment, we deploy the Event Study methodology to scrutinize the effect of pronounced external downside risk on mutual fund performance. Our findings reveal that downward pressure initially exerts a significant negative influence, which attenuates as public apprehension recedes. Subsequent analyses employing Difference-in-Differences and Propensity Score Matching methods demonstrate that style drift serves to mitigate the adverse impact of downward pressure on fund performance. Notably, active style drift positively influences fund performance as it manifested by net fund inflows and the stock selection prowess of fund managers.

Is style drift informative? Evidence from mutual funds in China

In this study, we investigate whether the style drift of portfolio managers is informative. We establish that style drift is based on public information rather than the imitation of peers. Fund managers are found to adjust their portfolios to align with market expectations, particularly in normal market conditions. However, we observe a pronounced shift towards irrational herd behavior during market turbulence and style rotation periods. While style drift can offer benefits in contemporary periods, such as positive risk-adjusted returns, the funds that exhibit excessive drift can hardly beat their peers in subsequent periods. More notably, sophisticated investors tend to abandon funds with more considerable style drift in favor of those adhering to a consistent investment strategy. Our findings indicate that while style drift may be a strategic response to market conditions, its advantages are transient and often unaligned with the preferences of sophisticated investors.

Style Drift and Performance Evaluation of Green Funds in China

Based on data of China's open equity and partial equity hybrid green funds from 2018 to 2022, this paper conducts the sharp style analysis model to construct green fund style drift indicator, and apply the TM model to construct stock selection and timing indicators. Moreover, this paper constructs a panel fixed-effect model to empirically analyze the impact of green fund style drift, stock selection and timing on green fund performance. This research finds that there is a drift of investment style in green funds. Such style drift and timing have a negative impact on the performance of green funds. Stock selection has a significant positive impact on green funds. Furthermore, this research introduces style drift, stock selection and timing indicators into green fund performance evaluation, and use principal component analysis method to build a green fund performance-evaluation system. Then, this paper applies the rating system to the existing green fund market and effectively supplements the existing rating system.

Research on Identification and Correction of Fund Investment Style Drift Based on FSD Model

Research on Identification and Correction of Fund Investment Style Drift Based on FSD Model

Research on the Influence of Fund Performance on Investment Style Drift under Different Sizes

Research on the Influence of Fund Performance on Investment Style Drift under Different Sizes

Does the style drift caused by frequent cross-industry portfolio rebalancing harm fund performance? Evidence from China

The impact of mutual fund managers' investment behavior, such as chasing hot trends and betting on specific sectors through frequent cross-industry rebalancing, on future performance remains unclear. We constructed a new style drift index to quantify this phenomenon and found a negative correlation between style drift and future performance. The above conclusion still holds after a series of robustness tests. Further analysis shows that this relationship is weaker in funds with higher historical stock-picking ability. Overall, the conclusions of this paper have important implications for mutual regulation and guiding individual investors' investment decisions.

Investment styles of islamic equity funds

We investigate the dynamics of investment styles of Islamic equity funds (IEFs), mainly through portfolio holdings. We rely on an unbiased survivorship sample of 224 active portfolios domiciled in 22 countries from 2004 to 2018 to shed new light on style concentration. IEFs are overwhelmingly skewed initially to value stocks in Islamic countries and growth stocks in non-Islamic countries. We find a subsequent shift from these styles to a more blended approach. Investments in Islamic countries shift from mid-cap to large-cap stocks, while those in non-Islamic countries remain in extremely large-cap stocks. The propensity of style shift is larger in asset type than in asset size. The style drift analyses show that most IEFs drift in style, with a more aggressive drift in Islamic countries than in their non-Islamic counterparts. They are more likely to alter their portfolio exposure in the sight of adverse outcomes. Implications of our results for faith-based investors and regulators are identified in the study.

Drifting from the Sustainable Development Goal: Style Drift in ESG Funds

In this paper, we investigate the impact of fund style drift away from sustainability on future fund flows and performance within the Chinese market. Utilizing data from four mainstream ESG rating systems, we develop a novel measure of ESG fund style drift, which enables us to quantify the deviation of a fund’s actual style from its declared sustainable objectives. Our analysis, based on panel and logistic regression techniques, reveals a significant positive relationship between ESG-drift and ESG fund’s flow-performance sensitivity, with a dominant effect on fund flow from individual investors. Interestingly, compared with ESG funds that stick with their sustainability-oriented objectives, funds experiencing ESG-drift exhibit poorer returns, underperformance, smaller fund size, lower subscription rates, lower industry concentration, and lower fund flows, highlighting the crucial role of funds following objectives that prioritize sustainability. However, the ESG-drift does not significantly influence the fund’s future performance. This paper provides pivotal insights into the complex dynamics between a fund’s ESG commitment and its actual style, with important implications for enhancing ESG policies within the regulatory framework of the Chinese mutual fund market.

Mapping the venture capital and private equity research: a bibliometric review and future research agenda

The fields of venture capital and private equity are rooted in financing research on capital budgeting and initial public offering (IPO). Both fields have grown considerably in recent times with a heterogenous set of themes being explored. This review presents an analysis of research in both fields. Using a large corpus from the Web of Science, this study used bibliometric analysis to present a comprehensive encapsulation of the fields’ geographical focus, methodological choices, prominent themes, and future research directions. Noteworthily, the foundational themes in venture capital research are venture capital adoption and financing processes, venture capital roles in business, venture capital governance, venture capital syndication, and venture capital and creation of public organizations. In private equity research, style drift into venture capital emerges as a key theme alongside buyouts and privatization, and valuation and performance of private equity investment.

Fund style drift and stock price crash risk – analysis of the mediating effect based on corporate financial risk

PurposeThis paper aims to identify the direct impact of fund style drift on the risk of stock price collapse and the intermediary mechanism of financial risk, so as to better protect the interests of minority investors.Design/methodology/approachThis paper takes all the non-financial companies on the Chinese Growth Enterprise Market from 2011 to 2020 as study object and selects securities investment funds of their top ten circulation stocks to study the relationship between fund style drift and stock price crash risk.FindingsFund style drift is likely to add stock price crash risk. Financial risk is positively correlated with stock price crash risk. Fund style drift affects stock price crash risk via the mediating effect of financial risk, and fund style drift and financial risk have a marked impact on the stock price crash risk of non-state enterprises, yet a non-significant impact on that of state-owned enterprises.Originality/valueThis paper links fund style drift with stock price crash risk in an exploratory manner and enriches the study perspectives of relationship between institutional investors’ behaviors and stock price crash risk, thus enjoying certain academic value. On the one hand, it furnishes a new approach to the academic frontier issue concerning financial risk and stock price crash risk, and proves that financial risk is positively correlated with stock price crash risk. On the other hand, it regards financial risk as a mediating variable of fund style drift for stock price crash risk and further explores different influencing mechanism of institutional investors’ behaviors.

Style Drift and Alphas: A Case Study in International Retail Funds

This paper examines style drift and alphas for a sample of 110 international retail funds offered to individual investors. We show that when fund managers “deviate” from their stated categories, alphas are biased upward. While previous studies in the international stock arena typically employ theoretical constructs to benchmark fund performance, we employ an actual investable vehicle (tradeable ETFs) in the same categories as the funds. For the period 2002-2020, we show empirically that managers do indeed deviate from their stated fund categories with subsequent upward bias to their fund alphas. For over half of the funds in our sample, we find significant drift to emerging markets and to the US equity market. We observe that alpha is biased upward an average of 86 basis points for the retail funds examined in this study.

Software is Eating the World: Using Machine Learning to Analyze Private Equity Style Drift Toward Software

Software is Eating the World: Using Machine Learning to Analyze Private Equity Style Drift Toward Software

Investment performance attribution of the U.S. small-size value mutual funds using Fama-French five-factor model

The purpose of this study is to get an insight into the investment performance of the U.S. small-size value mutual funds. The Fama-French five-factor model was used to perform the regression of the portfolio returns composed out of the mutual funds with the chosen investment theme, as well as the regression at the individual level for 64 analyzed mutual funds, against the model's factors. The study covers the period from January 2010 until November 2021, using monthly returns. Our findings suggest that the factors from the original three-factor models are in line with the expectations and there is no presence of the potential style drift. In addition, the operating profit factor shows the expected causality relation. However, the exposure relating to the investing factor is slightly negative and may be surprising to a certain extent, having in mind the stated value style. Investment performance attribution of the portfolio explained the portfolio returns in the relation to the factors and found out that there is a statistically significant underperformance. Positive contributors to the investment performance are, in the presented order of the importance, market premium, as well as portfolio tilt towards stocks of the companies with the strong operating profit, small-capitalization, and aggressive investing policy. Lastly, value-style tilt led to negative performance contribution because the style was out of favor.

The Investment Style Drift Puzzle and Risk-Taking in Venture Capital

Limited partners allocate capital into venture capital funds with the expectation of a risk-return profile matching the fund's investment style in terms of startup investment stage, location and industry. This paper draws a connection between style drifts in these three dimensions and the connected risk-taking attitude of the general partner. By analyzing a sample of 31,521 investments with respect to the motivation for style drifts, this paper seeks to answer whether style drifts are deliberate risk-shifts or happen out of competitive pressure. The results suggest that venture capitalists increase risk, when they have strong past performance and public markets are bullish in order to make the most of the balance of compensation and employment incentives. This balancing most likely constitutes an agency conflict between limited partners and general partners. Further, results show that most risky style drifts have a negative impact on the probability of a successful exit even after controlling for performance persistence and endogeneity. Finally, the findings show that aggregate style drift has a negative effect on a fund's performance measured as its exit rate.

Style Drift among Value and Growth Funds

In the United States, retail investors rely heavily on the mutual fund industry to meet long-term objectives such as preparing for retirement. One segment of the mutual fund industry identifies as value stock funds, while another identifies as growth stock funds. Anecdotal evidence suggests that mutual funds in both categories deviate from their stated style for some of their purchases. We identify what proportion of each types’ funds are invested in crossover stocks that do not fit the funds’ stated investment styles and whether this deviation earns abnormal positive returns. We find that mutual fund managers frequently hold stocks outside their identified style; this effect is larger for value fund managers holding growth stocks. We find that, on average, growth fund managers earn higher returns than their index on these “crossover” stock holdings. We conduct a simple attribution analysis and provide weak evidence that managers of large-cap growth funds can time their investment in value stocks, and strong evidence that both large and small-cap growth fund managers can successfully select underpriced value stocks. The same is not true of value fund managers. <b>TOPICS:</b>Mutual fund performance, indexing exchange-traded, manager selection <b>Key Findings</b> • Managers of value funds, particularly small-cap value funds, frequently and consistently deviate from their stated fund objective. • Deviating from fund style does not generate excess returns for value fund managers by either timing or selection. • Growth fund managers generate excess returns by investing in value stocks, particularly from selecting underpriced value stocks, though they deviate from style less often.

Early indicators of fundraising success by venture capital firms

We show how a venture capital firm's fundraising is affected by its investment choices. We investigate three leading indicators that are calculated from the types of investments the venture capital firms make: style drift investments, follow-on investments, and investments in which the venture capital firm is not the lead investor in the portfolio company. We find that these investment characteristics are associated with lower fundraising. Characteristics and the reaction of fundraising to characteristics are both moderately stable through time. We also find some evidence that information about investment characteristics is more important for fundraising during bad states of the world and that ex-ante characteristics are related to eventual exit outcomes and financial performance.

The shrouded business of style drift in active mutual funds

This study investigates the motivation and performance consequence of intentional style drift in an exclusively in-house fund management industry in China. With style drift, fund investors are exposed to investment portfolio outside their risk-return preference but are generally unaware that their risk and return expectations are disrupted, and the functioning of the fund market undermined. Our study provides evidence for the first time about the incentive that motivates style drift behavior. We find that style drift increases a fund's subsequent net inflows, thus affirming the maximization of AUM-linked compensation as the motivation for fund manager's style drift behavior. We also find that larger funds have greater incentive to drift. We demonstrate that style drift behavior interferes with the picking of quality stocks to deliver fund performance for fund investors. Style drift as an unobserved risk behavior harms fund investor interest and undermines market integrity.

The devil in the style: Mutual fund style drift, performance and common risk factors

Style drift contributes to mutual fund performance at the cost of additional risks associated with styles. We find that, although style drift enhances the net return of Chinese mutual funds by 3.03% per month relative to peer funds, the profit is at risk. That is, applying the Carhart four-factor model with style drift leaves fund investors no significant premium (i.e. α=0.02% per month, t=0.20). Both active and passive style drifts can leverage up fund performance, but risk-adjusted returns show that low passive style drift funds benefit more from subsequent active style drifts than high passive style drift funds. Cross-sectional results are consistent with portfolio results, and further show that the predictive power of style drift is neither driven by insider information nor by idiosyncratic volatility.

Style Consistency and Mutual Fund Returns: The Case of Russia

This paper carries out style analysis for Russian mutual funds using monthly data from the National Managers’ Association over the period January 2008-December 2017; specifically, it applies the RSBA method developed by Sharpe (1992) for evaluating the impact of style on returns, and uses the Style Drift Score (SDS) introduced by Idzorek (2004) as a measure of a fund’s style drifting activity. The main findings can be summarised as follows. In the Russian case there is a significant positive relationship between style consistency and profitability of funds. Further, Russian funds are characterised by a high level of style drift, namely deviations from the investment strategy declared at the time of registration as required by Russian law.

The Presence of Style Drift in Active Mutual Funds: Evidence from China

Fund managers’ style drift behaviour alters fund risks and may have an impact on fund performance that is detrimental to fund investor’s interest. This paper is a first study on the existence and effects of style drift in the fast growing fund management industry in China. It provides a fine-grained analysis of China’s open-end equity funds based on our fund classifications that accurately reflect the true style of each fund whose name, objective, strategy, philosophy and prospectus are all manually analysed for drift detection. Employing a holding-based methodology and using a unique Chinese dataset, we find evidence of style drift in China. The behaviour is found regardless of fund age. We also examine whether style drift is influenced by fund characteristics and investment timeframe. Our findings offer a new approach in addressing the issue of style drift with evidence providing new insights on fund performance evaluation and design of fund managers’ compensation.