This study examines whether investors would benefit by selecting mutual funds whose managers tend to maintain a consistent investment style over time rather than selecting funds whose investment styles vary significantly. The authors use the term investment style consistency to describe the degree to which managers maintain portfolios that are consistent with the fund’s designated investment strategy. The degree of a fund’s style consistency is an important decision made by the mutual fund manager. Consistency can remain stable or vary over time as managers attempt to select undervalued securities that are not a part of the fund’s benchmark index or as they shift assets across various investment styles in an attempt to generate superior returns. The focus of this study is on the relationship between consistency and future fund performance.

            The authors measure investment style consistency as the r-squared (coefficient of determination) of the regression of a fund’s returns against the four factors of the Carhart model. The r-squared captures the portion of the variability of a fund’s return series that can be explained by co movements in the returns of the Carhart factors. As defined, a higher r-squared represents a fund that has a higher level of consistency in investment style over time. Using a sample of over 6,000 mutual funds covering the time period 1988 to 2003, the authors calculate style consistency for each of the funds on an annual basis using the previous 36 months of return data. They find wide variation in consistency across funds regardless of fund classification. 

The most important result of the study is that more style consistent funds outperform less style consistent funds. The authors sort funds based on various combinations of expense ratio, past performance (as measured by the alpha from the Carhart model), and past style consistency. On average, high consistency funds outperform low consistency funds by 0.37% per year over the sample period. When all three variables are considered, a portfolio consisting of high consistency/high alpha/low expense ratio funds outperforms a portfolio of low consistency/low alpha/high expense ratio funds by 1.71% per year, and the former portfolio has less risk. These results indicate the style consistency measure provides additional information about fund performance beyond the information provided by alpha and expenses. To ensure the validity of the results, the authors use an alternative measure of style consistency and find qualitatively similar results. The authors do note that the results may be driven by the better performance of the more style consistent funds during rising stock markets and that consistency may not be as important a factor during bear markets.   

            Overall, examining a fund’s investment style consistency, particularly in combination with its past performance and expense ratio, can help investors develop portfolios that generate above average returns.