rolling-window asset class coefficients from the center of gravity in K-dimensional space. A fund with a high SDS will represent greater style inconsistency than a fund with a low SDS.
Idzorek and Bertsch stand for the point that it is an effective, time-efficient way that comparing style consistency and eliminating the need to examine rolling window style graphs via SDS.
5. Results
Demonstrating the extent to which these mutual funds maintain over time, we estimate the SDS for each fund. Those mutual funds with higher SDS will be considered that have little consistent investing styles comparing with those of have smaller SDS. In order to gain a better understanding for the range of style drift scores, we use a return-based style analysis for all mutual funds with at least 10 years of data and examine a set of mutual funds in TEJ categorized as equity fund by Ph.D Shean-Bii Chiu and Tsun-Siou Lee.
Exhibit 1 displays a histogram of the thirty fund managers. The average style drift score is 3.79. We can clearly see that twenty of thirty (2/3) top mutual funds over 10 years in Taiwan have SDS=0 which means manager doesn’t change his style characteristics significantly during the investing time or we can say, these managers have specific favorite preferences on some type of stocks and stick to it. One of the zero-SDS mutual funds even changed its responsible manager last year but it still has remained SDS equal to 0 so far. In other words, this successor’s investing characteristic conforms to the old one so investors don’t have to worry about this personnel change will affect their diversification or allocation. The SDS range most of the top thirty funds are
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distributed is less than ten and centralizes at zero.
EXHIBIT 1
Calculating SDS of each mutual fund, we can obtain exhibit 2. Top 1 mutual fund over the 10 years has SDS equaling to 6.58 and the second place has 1.92 and the highest SDS among thirty funds is close to 37 and rank number six. We are very curious that according that Brown and Harlow (2002)
conclude, there is a positive relationship between investment style consistency and performance − more style-consistent funds will produce higher total and relative returns than less consistent funds. In other words, the better the performance is, the smaller the score should be. However, this claim seems not very obvious in our sample results especially for the top 1 which has the highest returns accompanied with the sixth largest SDS.
But for Brown and Harlow (2004), style consistent managers are less likely to make asset allocation errors than those that try to time the market. In contrast, they consider that there is potential for underperformance with such a
propensity to maintain a constant style profile and, therefore, overlook opportunities for market timing. Hence, we can consider this condition to
0
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explain the phenomena for the top 1 mutual fund with SDS 6.58, this fund manager might have excellent skills for market timing and stocks selection around small group or large group and so does the manager for fund 6. we can say less conservatively, most of the top thirty mutual funds still have relatively small SDS (tend to zero) and good performance over ten years if excluding fund 6 with SDS equaling to 36.64,the biggest SDS in our sample set. At least,
‘on average’, our results somehow match with Brown and Harlow (2004)’s opinions.
EXHIBIT 2
Exhibit 3 displays the allocated weights of a mutual fund in each type of stocks, and the fund number represents its performance in terms of relative ranking.
For example, Fund 3 represents the third in order.
We can clearly see all the mutual funds spent its most part of investing proportion in small capitalization stocks (the green zone) and medium capitalization stocks (the red zone) except for the fund 29. It has larger
proportion in the large capitalization stocks. Domestic equity funds can invest in the small, medium or large stocks without proportionate constraints as long
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as meeting the requirement−not short selling. From the allocated maps, we find that most managers centralize much of portions in small group,
accompanied with less part in medium or large stocks. The assumption we make is that the active manager declares the fund style at the beginning of each period and is engaged only in picking undervalued securities within each style benchmark asset class. It can somehow infer that fund managers have preference toward small size stocks and consider small stocks might tend to have more undervalued conditions.
Sometimes, investing websites in Taiwan misclassify Domestic equity mutual funds as the same level as ones only allowed investing in the small or mid-cap equity so-called Taiwan Small/Mid Cap Category. Compared and ranked the performance of general domestic funds to small-cap or mid-cap funds together that are built in the distinct investing philosophy and group may mislead
investors’ judgment about the risk-to-reward relationship. But if we apply this kind of classification, then the SDS for these funds will be smaller. In other words, we add the green and the red zone together, and only the purple area is drift of allocated weights that are investing in the large-cap value stocks.
Therefore, fund 29 has the most serious degree of style drift over time in this classification. From 73% versus 27% for the proportion to small cap and large cap respectively at the starting day and we can see the trend decreasing for the proportion to large cap. To mention again, this classification loses its objectiveness and only applies in Taiwan.
EXHIBIT 3
Portfolio Allocated Maps with Increasing Style Drift Scores
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