Style drift: Evidence from small-cap mutual funds

Cao, Charles; Iliev, Peter; Velthuis, Raisa

doi:10.1016/j.jbankfin.2017.01.009

Cited by 43 publications

(12 citation statements)

References 16 publications

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“…Our results confirm the findings of Cao et al (2017) in the case of the fund size, and of Herrmann et al (2016) in the case of the one-month lagged return. The other results concerning other characteristics that we found essential to the classification of openend investment funds based on the standard deviation seem to be pioneering.…”

Section: Other Characteristics Essential To Fund Classificationsupporting

confidence: 89%

Classification of Open-End Investment Funds Using Artificial Neural Networks. The Case of Polish Equity Funds

Perez

Szczyt

2021

Central European Economic Journal

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In this study we utilise artificial neural networks to classify equity investment funds according to two fundamental risk measures—standard deviation and beta ratio—and to investigate the fund characteristics essential to this classification. Based on a sample of 4,645 monthly observations on 37 equity funds from the largest fund families registered in Poland from December 1995 to March 2018, we allocated funds to one of the classes generated using Multilayer Perceptron (MLP) and Radial Basis Function (RBF). The results of the study confirm the legitimacy of using machine learning as a tool for classifying equity investment funds, though standard deviation turned out to be a better classifier than the beta ratio. In addition to the level of investment risk, the fund classification can be supported by the fund distribution channel, the fund name, age, and size, as well as the current economic situation. We find historical returns (apart from the last-month return) and the net cash flows of the fund to be insignificant for the fund classification.

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Section: Other Characteristics Essential To Fund Classificationsupporting

confidence: 89%

Classification of Open-End Investment Funds Using Artificial Neural Networks. The Case of Polish Equity Funds

Perez

Szczyt

2021

Central European Economic Journal

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“…Other authors have developed measures to detect the volatility of fund style changes over time but failed to consider how far mutual funds were from their stated investment objective, so they have focussed only on style drift in mutual funds (Idzorek and Bertsch, 2004). More recently, Cao et al (2017) reported that smallcap mutual funds allocated 27% of their portfolio on average to mid-and large-cap stocks.…”

Section: Theoretical Frameworkmentioning

confidence: 99%

Style-changing behaviour in the socially responsible mutual fund industry: consequences on financial and sustainable performance

Muñoz

Vargas

Vicente

2021

SAMPJ

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Purpose This study aims to examine style-deviation practices in the socially responsible mutual funds (SMRF) industry i.e. how mutual funds game their stated financial objectives to earn a higher relative performance ranking. In addition, the consequences of such practices on sustainable scores and money flows are studied. Design/methodology/approach A sample of 454 US equity SRMFs is studied. This paper uses panel regressions controlling for time and style fixed-effects. Findings This study finds that 17.60% of SRMF managers in the sample are engaged in style deviation practices. These practices positively impact the sustainable performance of SRMFs and negatively impact their financial performance. One effect offsets the other and they consequently do not affect money flows. Another finding is that only investors with lower portfolio sustainability scores do show return-chaser behaviour. Practical implications This paper reveals that SRMF managers deviating from their stated financial style face a dilemma that is non-existent for their conventional peers that is style deviation practices affect financial and sustainable performance in opposing ways, whereas SRMF investor utility depends positively on both dimensions. The findings are not conclusive about the effectiveness of style deviation practices in attracting SRMF money flows. Social implications SRMF industry has experienced tremendous growth in the past decade. The increased competition in this industry has led managers to strive to attract investors, sometimes by relying on irregular practices that enhance their portfolio results. Regulators should consider how to avoid such perverse behaviour with a view to improving mutual funds transparency. Originality/value This is the first research that analyses style deviation practices and their consequences for the SRMF industry.

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“…Although a large body of literature has identified the sensitivity of fund investors to fund performance, a topic that has attracted much less attention is the sensitivity of fund investors to investment style-changing behavior. 3 Previous findings are mixed; for example, Cooper, Huseyin and Rau (2005) find that a change in a mutual fund's stated investment objective, on 1 See diBartolomeo & Wikowski (1997), Brown & Goetzmann (1997), Kim, Shukla & Tomas (2000), Kim, White & Stone (2005), Cremers and Petajisto (2007), Sensoy (2009), Mason et al (2012), Bams, Otten & ramezanifar (2016) and Cao, Iliev and Velthuis (2017) among others. 2 See Barber, Huang and Odean (2016) and Berk and Van Binsbergen (2016) among others.…”

Section: Introductionmentioning

confidence: 99%