Style-neutral funds of funds: Diversification or deadweight?

Michael Stein, Svetlozar T. Rachev

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

This article aims to determine whether style-neutral portfolios built out of value and growth equity/mutual funds deliver benefits in terms of returns and diversification or whether they result in costly benchmark tracking products. We analyze style-neutral portfolios by building synthetic funds of funds (FoFs) out of both value- and growth-oriented equity funds and contrast their properties with the applicable benchmark and with style FoFs. Although a beneficial effect with respect to diversification and a resulting reduction in return dispersion can be seen, the simulated FoFs do not deliver a general risk-adjusted outperformance against the benchmark or the better performing style of a period. The variety of results indicates that FoFs may indeed benefit from investing in a style-neutral portfolio of growth and value funds, but only given that FoF managers are able to select the well-performing funds of the respective styles. In addition, we find that being able to shift between styles over time may lead to better results than locking FoFs into being style neutral.

Original languageEnglish
Pages (from-to)417-434
Number of pages18
JournalJournal of Asset Management
Volume11
Issue number6
DOIs
StatePublished - Feb 2011

Keywords

  • Diversification
  • Funds of funds
  • Portfolio deadweight
  • R ratio
  • Style neutral
  • Value and growth

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