Investment Style Volatility and Mutual Fund Performance


Keith C. Brown

W. V. Harlow

Hanjiang Zhang



July 2011





While a mutual fundís investment style influences the returns it generates, little is known about how a managerís execution of the style decision affects portfolio performance.We develop a holdings-based statistic to measure the volatility of a fundís style characteristic profile over time and demonstrate that, on average, funds with lower levels of style volatility significantly outperform more style-volatile funds on a risk-adjusted basis.We also show that style volatility has a distinct impact on future fund performance compared to fund expenses or past risk-adjusted returns and document that the level of unintentional style volatility is the primary determinant of the overall effect.We conclude that deciding to maintain a less volatile investment style is an important aspect of the portfolio management process.


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