TAILIEUCHUNG - On Mutual Fund Investment Styles

Daniel et al. (1997) further refine style-based performance mea- sures by examining the actual holdings of mutual funds, and measuring the characteristics of the stocks held by the fund. The characteristics include the market capitalization or size, a measure of value (the ratio of book value to market value), and the return over the previous year. For a given fund, the OE portfolio is formed by matching the char- acteristics of the portfolio held by the fund with “passive” portfolios constructed to have the same characteristics | On Mutual Fund Investment Styles Louis K. C. Chan University of Illinois at Urbana-Champaign Hsiu-Lang Chen University of Illinois at Chicago Josef Lakonishok University of Illinois at Urbana-Champaign and National Bureau of Economic Research Most mutual funds adopt investment styles that cluster around a broad market benchmark. Few funds take extreme positions away from the index but those who do are more likely to favor growth stocks and past winners. The bias toward glamour and the tendency of poorly performing value funds to shift styles may reflect agency and behavioral considerations. After adjusting for style there is evidence that growth managers on average outperform value managers. Though a fund s factor loadings and its portfolio characteristics generally yield similar conclusions about its style an approach using portfolio characteristics predicts fund returns better. Many crucial investment decisions are commonly delegated to professional investment managers. Portfolio managers however follow a wide variety of approaches and adopt different criteria for stock selection identifying underappreciated or cheap securities seeking growth potential or following past price trends to cite a few examples. The bewildering variety of approaches followed by money managers raises two broad questions. The first concerns the nature of the product that professionally managed funds deliver. In the case of mutual funds a fund s stated objective such as growth income or balanced historically served as a limited form of product differentiation. However these descriptions are generally too vague to be very informative. Because money managers are given much latitude the agency aspect of their roles prompts a second question. In particular managers personal career considerations may lead them to alter their behavior and adopt approaches that are more in favor with investors and financial consultants with possibly adverse consequences for fund performance. This article .

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