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 riskadjusted 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.