Three essays on style drift in mutual funds : a dissertation presented in fulfilment of the requirements for the degree of Doctor of Philosophy in Finance at Massey University, School of Economics and Finance, Albany Campus, New Zealand

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This thesis seeks to enhance our collective understanding of style drift in mutual funds. The first essay of this thesis provides a critical review of the current literature on the topic of style drift and presents newer ways of viewing the concept. In particular, it provides a detailed analysis of the U.S. mutual funds industry and proposes a conceptual framework to present a fuller picture of the phenomenon. This framework introduces the concept of style enhancement and presents a newer way of viewing style drift. The proposed framework offers insights beyond the traditional notion that classifies all types of deviations under one broad phenomenon of “style drift.” This thesis then, in Essay Two, attempts to identify a threshold level of deviation beyond which a fund is likely to be classified as misclassified. This essay provides practical implications to investors as it helps them in identifying when their portfolio is likely to move toward a point beyond which they should be watchful about the investment activities carried out by their fund managers. The deviations beyond this threshold level may expose them to risk adversely affecting their investment portfolio. The final essay of this thesis, Essay Three, investigates the relationship between the frequency of mutual fund holdings disclosure and style drift. This essay uses a difference-in-difference test to examine the impact of disclosure frequency on the style drift of mutual funds. The evidence suggests that style drift decreases with an increase in disclosure frequency and vice versa. The essay provides implications for the standard setting authorities, such as the Securities and Exchange Commission, to consider the impact of disclosure frequency on the style drift of mutual funds when determining optimal disclosure frequency. Keywords: Mutual Funds, Investment Style, Style Drift, Style Enhancement, Style Misclassification, Risk-Shifting Behavior, Style Misclassification, Investment Style, Performance, Tracking Error Mutual Funds; Portfolio Holdings Disclosure; Portfolio Disclosure Frequency, Style Drift, SEC Regulation, Difference-In-Difference Test
Mutual funds, Management, mutual funds, investment style, style drift, style enhancement, style misclassification, risk-shifting behavior, performance, disclosure, portfolio disclosure frequency, SEC regulation, difference-in-difference test