Style drift, fund flow and fund performance:
new cross-sectional evidence
Kathryn A. Holmes, Robert W. Faff*
Department of Accounting and Finance, Monash University, Victoria 3800, Australia
Abstract
The linkages between style change, fund flows, fund size, and resulting fund performance are
complex and not clearly understood. In this paper, we investigate these relationships using a sample
of Australian multisector trusts over the sample period 1990 to 1999. We employ a range of fund
performance measures of stock selectivity. We find that levels of style drift are positively related to
selectivity performance, but are not related to fund flows. We also find that fund size is positively
related to fund performance and negatively related to expense ratios. Implications of our findings for
investors are identified in the paper. © 2007 Academy of Financial Services. All rights reserved.
JEL classification: G23; G21; G10
Keywords: Style drift; Fund flows; Managed fund performance; Returns-based style analysis
1. Introduction
The style of many managed funds drift or even change over time (Brown & Goetzmann,
1997; Chan, Chen & Lakonishok, 2002; Kim, Shukla & Thomas, 2000; Swinkels & Van Der
Sluis, 2001). Although some style changes might be caused inadvertently because of
unrelated manager decisions, there is some evidence that funds might deliberately change
styles to attract new fund flow. In a notable recent example, Cooper, Gulen and Rau (2005)
find that a style change in a fund’s name can attract significantly abnormal flow in the months
after the change. They suggest that funds might time ‘style’ changes to exploit investor
* Corresponding author. Tel.: +61-3-9905-2387; fax: +61-3-9905-2339.
E-mail address: Robert.Faff@buseco.monash.edu.au (R. Faff).
Financial Services Review 16 (2007) 55–71
1057-0810/07/$ – see front matter © 2007 Academy of Financial Services. All rights reserved.