Practice What You Preach: Strategy Consistency and Mutual Fund Performance

We propose a novel predictor of equity mutual fund performance, "strategy consistency," defined as the degree to which a fund picks stocks most chosen collectively by managers with a similar self-declared principal investment strategy. Using a proprietary strategy classification based on textual analysis of fund prospectuses, we show that high-consistency funds earn significantly higher abnormal returns than low-consistency funds. Moreover, high-consistency funds with the strongest prior-month performance earn significantly positive abnormal returns of 4% per annum. Our results provide a possible explanation why most mutual funds underperform their benchmarks: they pick stocks that do not closely align with their primary strategy.