The (Mutual Fund) Imitation Game: On the Performance of 'Smart' Copycat Funds
48 Pages Posted: 31 Oct 2017 Last revised: 23 Sep 2018
Date Written: September 7, 2018
We introduce a novel methodology to identify trade imitation, or 'copycatting', in the mutual fund industry. Our process uncovers imitation activity at the individual stock level, and tags each trade as one in which a fund manager imitates, is imitated, or neither. We aggregate the resulting data for each fund, and obtain a "Copycat Score", defned as the difference between the percentage of fund assets invested in stocks in which the manager leads and follows. We find that imitation is pervasive in the U.S. equity mutual fund industry. However, most managers who imitated others' trades underperform. A small number of managers seem to be 'smart imitators'. We find that funds at the extreme ends of the Copycat Score range, which we label 'Leaders' and 'Followers', outperform other funds in the sample by as much as 1.92% and 3.24% per year, respectively. For these funds, imitation is profitable, and a behavior that is persistent in time. Moreover, we show that the Copycat Score is related to other measures of skill, and is a good predictor of fund performance. We conclude that smart imitation is yet another talent that a successful fund manager may possess, in order to outperform their peers.
Keywords: copycat portfolios; mutual funds; portfolio holdings; fund performance; fund manager skill
JEL Classification: G21, G23
Suggested Citation: Suggested Citation