Fund Herding, Manager Skill, and Future Mutual Fund Performance

Summary

This research summary examines whether mutual fund managers’ tendency to follow prior institutional trading can reveal investment skill. It describes a fund-level dynamic herding measure, FH, and tests whether funds with stronger herding subsequently underperform funds that trade against the crowd. In the reported U.S. active equity fund sample from 1990 to 2009, portfolios sorted by FH showed a negative relationship between herding and later returns. The summary reports an annualized spread of about 2.28%, with similar conclusions after risk adjustment and controls for fund characteristics.

Further analyses associate anti-herding with better stock selections, stronger prediction of later institutional trading, and more persistent performance differences, especially when opportunities are greater and among less experienced managers facing career concerns. These findings are observational and rely on historical U.S. mutual fund data; the summary does not establish that FH will work as a live selection signal or generalize to other markets and periods. Portfolio results and regressions support the authors’ interpretation that herding may proxy for skill, but cannot fully separate skill from other unobserved factors.

Key ideas

• The study defines fund herding as a dynamic tendency to follow earlier institutional trading behavior.
• Funds with stronger measured herding had weaker subsequent performance than anti-herding funds in the reported sample.
• The return relationship remained after risk adjustment and controls for fund characteristics.
• Anti-herding portfolios also showed stronger stock selection results and predicted later institutional trading.
• The evidence comes from historical U.S. active equity funds and does not guarantee out-of-sample usefulness.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.