A Research On Investment Style Drift Of Open-end Fund And Style Asset Rotation Strategy

Overseas reasearches on fund investment style could be dated bake to the early 1970s, generating fruitful research conclusions which have been widely applied into the financial practice. These scholars have conducted very systematical studies on the following aspects, the method to identify fund style, quantification of the fund style drift level, causes to style drift, and the asset rotation strategy of investment style, etc. In great contrast, there is up till now only a few studies on investment style drift in China; furthermore, these studies just aim at justifying its existence. As a result, few literatures have been carried out to investigate the influence factor of style drift, quantification of the style drift level, impact of style drift on investment strategies and performance and the effectiveness of the asset rotation strategy.This study aims to explore an innovative research method to the above mentioned perspectives. Firstly, we constructed a critirion to measure the style drift level of fund and another criterion to test its trading strategy, basing on the style dimension. Secondly, we adopted the Support Vector Machine (SVM) to develop an asset rotation model. A combination of these methods makes it possible to study the research questions of the present paper.A couple of conclusions could be drawn as follows:1) The fund manager's investment philosophy, fluctuations in cash flows and stock market style jointly lead to the style drift of fund. Among which, the fund manager's formation of investment philosophy is affected by his/her personal characteristics, whereas the fluctuation in cash flows is accused by investor emotional fluctuation. Among these three factors, investment philosophy could be attributed as the internal factor, while the rest of them as the external factors. The result reveals thatâ‘ some personal characteristics such as overseas study background, professional qualification certificates and working experience contribute to maintain fund style consistency;â‘¡fund managers with a doctoral or master's degree show greater tendency to drift their styles than those with only a bachelor's degree;â‘¢changes in fund managers and fund operation time have positive correlation with fund style drift;â‘£the centralized management model in funds helps to reduce style drift in the bear stock market, but fails to have significant effect on style drift in the bull stock market.2) In the long run, style drift has produced significantly negative influence on investment performance; and the fund flow volatility also remarkably reduces the fund performance. We also found that the relationship between fund performance and style drift varied with different kinds of stock market in the short run. Style drift will enhance fund performance in the bear stock market, however, weaken fund performance in the bull stock market.3)There is a remarkable value premium in the Chinese stock market. The size style rotation strategy is found to outweigh the small cap holding strategy and the stock market profit. Therefore, a tentative conclusion is drawn that it is suitable to take the size style rotation as a short-term investment strategy. Apart from this, our empirical analysis also showed that the fixed value-oriented style strategy could perform better than the value style rotation strategy and the small cap holding strategy. It is then concluded that we should take the fixed value-oriented style strategy as a long-term investment strategy.Fund investment style drift is still a research hotspot. Compared with the previous studies, the innovations and contributions in this paper are as follows:1)We pointed out the advantages and disadvantages of the three common kinds of style identification methods (They are the Morningstar method, the Sharpe style model and the Fama-French model, respectively.) and their application fields. Taking its many defects into consideration, we modified the Sharpe model to be capable of offering the statistical significance and confidence interval of model-style weights as well as determining the style drift characteristic. In this way, we have enhanced the accuracy and reliability of analysis result.2)We adopted the improved Sharpe model to measure the style drift level of the open-end fund in China, revealing the characteristics of fund managers'investment behavior at different times. At the same time, we further analyzed the impact of style drift on fund performance. Results of the present study have provided empirical supports for the investors, fund companies and regulators to evaluate and monitor their fund managers'investment behavior.3)This paper also probed into the effectiveness of asset rotation strategy in the Chinese stock market during the period of 2005-2008. It was revealed that the size style rotation is fit for short-term investment, whereas the fixed value-oriented style is beneficial for long-term investment. These conclusions reinforced the importance of promoting long-term value investment philosophy. It also illuminates the skills on making investment strategy and maintaining the consistence of investment style for the fund companies.4)The present study has generated two implications for investment management practice. Firstly, it facilitates the fund companies to maintain the stability of investment style according to the individual characteristics of their fund managers. Secondly, it directs the institutional investors to select the best fund manager by observing the style drift.