Estimating Portfolio Style in U.S. Equity Funds

Abstract

Investment style has become a prominent concept in the world of investment management. Peer groups used by rating agencies to rank investments are built according to style. Little academic research has empirically compared the two most common approaches to investment style: portfolio-based (fundamental) and returns-based style analysis. This article completes the literature with an empirical analysis of the two methods' accuracy using 287 open-end diversified U.S. equity mutual funds for six years. While both methods are useful, the portfolio-based approach is generally more accurate. Moreover, fundamental analysis maintains its advantage even when older portfolios are used. This result counters a frequent criticism of the approach.

TOPICS: Factors, risk premia, style investing