Fund governance and style drift

- Funds with higher governance quality exhibit lower style drift.
- Better governed funds drift less in all style dimensions.
- Funds with high managerial ownership drift more.

This paper provides evidence on the effectiveness of fund governance in containing investment style drift in the mutual fund industry. Based on a sample of 273 open-ended U.S. mutual funds with style objectives from 2007 to 2011, we find that funds with better governance exhibit less style drift. Individual governance components, particularly board quality and fees, are highly significant in explaining style drift. Contrary to our expectation, funds with better managerial incentives drift more. Further analysis shows that this positive association is present only at high managerial ownership levels (more than $1 million), suggesting that managers of such funds have more leeway to deviate from their pronounced style in the pursuit of alpha.