Mutual Fund Styles

We propose a new empirical approach to determination of mutual fund styles. This approach is simple to apply, yet it captures nonlinear patterns of returns that result from virtually all active portfolio management styles. We find that the largest equity fund category, “Growth” typically breaks down into several styles that differ in composition and strategy. Our classification method identifies fund groupings that are useful predictors of cross-sectional future performance, as well as past behavior. Not only are they superior to common classifications such as “Growth” or “Income,” but they also outperform classifications based upon risk measures and analogue portfolios