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Rev Fin 2002; 15:1407-1437
© 2002 the Society for Financial Studies

On Mutual Fund Investment Styles

Louis K. C. Chan
University of Illinois at Urbana-Champaign

Hsiu-Lang Chen
University of Illinois at Chicago

Josef Lakonishok
University of Illinois at Urbana-Champaign and National Bureau of Economic Research

Address correspondence to Louis K. C. Chan, College of Commerce, University of Illinois at Urbana-Champaign, 340 Commerce West Building, MC706, 1206 South Sixth Street, Champaign, IL 61820, or e-mail: l-chan2{at}uiuc.edu.

Abstract

Most mutual funds adopt investment styles that cluster around a broad market benchmark. Few funds take extreme positions away from the index, but those who do are more likely to favor growth stocks and past winners. The bias toward glamour and the tendency of poorly performing value funds to shift styles may reflect agency and behavioral considerations. After adjusting for style, there is evidence that growth managers on average outperform value managers. Though a fund's factor loadings and its portfolio characteristics generally yield similar conclusions about its style, an approach using portfolio characteristics predicts fund returns better.


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