Does mutual fund style category composition explain the benefits of family diversification? Pubblico

Abstract

This study examines the influence of family and investment style category factors on the cross-sectional variance and correlation structure of actively managed U.S. mutual fund returns. I find that actively managed fund family returns are largely driven by category factors, and that cross-family correlation rises when accounting for the category composition of the families. In particular, category structure explains roughly half of the cross-sectional differences in family return volatility. Diversification across categories within the same family seems to be a better bet than diversification across families within the same category. My findings suggest that category diversification explains a considerable portion of the rise in investor risk that previous studies have identified when investments are constrained to funds within just one family.

Table of Contents

1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

2. Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2.1. Sample construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2.2. Category composition and return correlations . . . . . . . . . . . . . . . . . 4

3. Model and empirical design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

3.1. Modeling decomposition into fixed effects . . . . . . . . . . . . . . . . . . . . 5

3.2. Choosing a baseline return . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

3.3. Components of family returns . . . . . . . . . . . . . . . . . . . . . . . . . . 7

3.4. Understanding variation in family returns . . . . . . . . . . . . . . . . . . . 8

3.5. Components of category returns . . . . . . . . . . . . . . . . . . . . . . . . . 8

3.6. Value-weighted decomposition . . . . . . . . . . . . . . . . . . . . . . . . . . 9

4. Decomposition results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

4.1. Role of family and category effects in return volatility . . . . . . . . . . . . . 10

4.2. Absolute family and category effects and model fit . . . . . . . . . . . . . . . 11

4.3. Decomposition corrections in family and category correlations . . . . . . . . 11

4.4. Implications for portfolio diversification . . . . . . . . . . . . . . . . . . . . . 12

5. Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

About this Honors Thesis

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School	Emory College
Department	Economics
Degree	B.A.
Submission	Honors Thesis
Language	English
Research Field	Economics, Finance
Parola chiave	mutual funds
Committee Chair / Thesis Advisor	Jeong Ho (John) Kim, Emory University
Committee Members	Caroline Fohlin, Emory University Bree Ettinger, Emory University

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