Determining a mutual fund's equity class
DOI:
https://doi.org/10.61190/fsr.v15i3.4858Keywords:
Investment style, Equity class, Asset allocation, Mutual fundsAbstract
Mutual fund investors who use an asset allocation model must be able to readily identify each fund's equity class. Prior studies examine two approaches to classifying equity funds, factor loadings and portfolio characteristics. Their implementation is not feasible for many investors, however. I investigate a practicable alternative, Morningstar's characteristics-based style box. I find that it does not predict mutual fund returns as well as a discrete factor-loadings-based alternative during 1994 to 2004 overall, but predicts better in 2003 to 2004 after Morningstar changed its methodology. I also find that fund classifications drift considerably over the years. Actively-managed-fund investors need to monitor their portfolios regularly.
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