The Relation between Mutual Fund Performance and Investment Style Changes

Abstract

The dynamism of the mutual fund industry induces frequent changes in categories. Theoretically, these changes occur after the modification of the investment policy. Nevertheless, in this paper, we empirically show that mutual funds can leave a category for reasons more related to fund performance. We examine if the change in the investment style category of a mutual fund is due to changes in its investment policy or if such change is the consequence of other motivations. We show that mutual funds whose profitability ranking within the category to which they belong to are low have more incentives to change category. Mutual funds are more willing to exit from a category if an investment style category decreases in terms of assets under management and when the category performance from the previous twelve months is lower than the performance from the whole performance period.