Fund style drift and fund performance: Evidence from China
1School of Finance, Shanghai University of Finance and Economics, Shanghai, P.R. China.
Plos One
|February 6, 2025
Summary
Fund style drift generally boosts returns, but the source matters. Stock picking skill enhances performance, while trend chasing diminishes it, offering insights for fund managers and regulators.
Area of Science:
- Finance
- Investment Management
- Behavioral Finance
Background:
- Fund style drift is a common phenomenon in open-end funds.
- Understanding its impact on fund performance is crucial for investors and managers.
- Existing research often overlooks the nuances of different style drift drivers.
Purpose of the Study:
- To investigate the impact of fund style drift on the performance of equity and hybrid open-end funds in China.
- To differentiate the effects of various types of style drift on fund returns.
- To propose a novel industry allocation-based measurement for style drift.
Main Methods:
- Utilized quarterly data for Chinese equity and equity-oriented hybrid open-end funds from 2007 to 2022.
- Employed a two-way fixed effects model to analyze the relationship between style drift and fund performance.
- Developed a new measurement for style drift based on industry allocation.
Main Results:
- Overall fund style drift was found to positively correlate with fund performance.
- Style drift driven by superior stock-picking abilities led to enhanced fund returns.
- Style drift motivated by chasing market trends resulted in reduced fund performance.
Conclusions:
- The impact of fund style drift on performance is contingent on its underlying drivers.
- A new industry allocation-based measurement provides a foundation for theme fund research.
- Findings offer actionable insights for optimizing fund performance evaluation and regulatory policies.
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