How Investor Sentiment Changes the Effect of Stock Synchronicity on Fund Performance

Summary

This research review examines whether stocks moving together always reduce active mutual fund performance. It distinguishes synchronicity driven by broad market information from synchronicity associated with noise trading, proposing that investor sentiment helps explain when each mechanism dominates. The study measures monthly stock synchronicity from regressions of individual returns on market and industry returns, then relates that measure and manager skill to fund performance. Its sample covers active US equity mutual funds and stocks over 2000–2014, with sentiment classified using the Baker–Wurgler index.

The reported results show a negative average association between synchronicity and fund performance, moderated by manager skill. The negative relationship appears during low-sentiment periods, while it disappears during high-sentiment periods; skilled managers perform relatively better in both settings. The authors interpret low-sentiment synchronicity as reflecting common market information and high-sentiment synchronicity as more consistent with noise. These are observational findings from a historical US sample, so they do not establish causality or guarantee that the pattern applies to other markets, including China.

Key ideas

• The study treats investor sentiment as a condition that may change what high stock synchronicity represents.
• It measures synchronicity using market and industry return regressions and evaluates fund performance alongside manager skill.
• High synchronicity is negatively associated with fund performance in low-sentiment periods, but not in high-sentiment periods.
• Managers with stronger measured skill appear better able to offset the performance effects of synchronicity.
• The historical US results may not transfer directly to other equity markets.

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