Staying the Course: The Role of Investment Style Consistency in the Performance of Mutual Funds

While a mutual fund’s investment style influences the returns it generates, little is known about how a manager’s execution of the style decision affects portfolio performance. Using both holdingsand returns-based techniques to measure the consistency with which managers approach their investment mandates, we demonstrate that, on average, more style-consistent funds significantly outperform less style-consistent funds on a risk-adjusted basis. This result differs from portfolio turnover and expense ratio effects and is robust with respect to the period and method used to measure future returns. We also show that fund style consistency and risk-adjusted performance persistence over time are distinct influences and demonstrate the potential profitability of trading strategies based on their combined impact. We conclude that deciding to maintain a consistent investment style is an important aspect of the portfolio management process. JEL Classification: G11, G14