Style analysis for diversified US equity funds

In this study, we consider two methods of returns-based style analysis (RBSA) for classification of investment styles for a single asset class, US Diversified Equity Funds. We extend Sharpe's style RBSA by forming style groups using cluster analysis and RBSA factors. We also introduce a parsimonious Best Fit Index (BFI) of style classification that explicitly acknowledges the existence of market segmentation and practitioner bench-marking. The methods provide complementary information about mutual fund returns. Both methodologies explain a significant proportion of the cross section of out-of-sample returns, but the BFI method performs better out-of-sample is more transparent and more closely aligned to investment practice.