Exploring Style Herding by Mutual Funds

Abstract

This paper studies the added value of intentional style herding for mutual fund managers. We find that herding in styles is significant and persistent, especially for active funds. We also report that herding tends to increase after periods of high market volatility, and decrease with sentiment. Furthermore, herding causes temporary mispricing and changes in the autocorrelation structure of factor returns. Importantly, we find that herding increases mutual funds' performance, whereas it reduces flows. Overall, the results illustrate that although herding can be beneficial for the fund manager, its potential has not yet been reached.

Keywords: herding, mutual funds, style investing, asset pricing

JEL Classification: C32, G12, G23