The (Mutual Fund) Imitation Game: On the Performance of 'Smart' Copycat Funds

48 Pages Posted: 31 Oct 2017 Last revised: 23 Sep 2018

See all articles by David A. Lesmond

David A. Lesmond

Tulane University - A.B. Freeman School of Business

Roberto Stein

University of Nebraska at Lincoln - Department of Finance

Date Written: September 7, 2018

Abstract

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

Lesmond, David A. and Stein, Roberto, The (Mutual Fund) Imitation Game: On the Performance of 'Smart' Copycat Funds (September 7, 2018). Available at SSRN: https://ssrn.com/abstract=3061898 or http://dx.doi.org/10.2139/ssrn.3061898

David A. Lesmond

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
511 Goldring-Woldenberg Hall
New Orleans, LA 70118
United States
504-865-5665 (Phone)
504-865-6751 (Fax)

Roberto Stein (Contact Author)

University of Nebraska at Lincoln - Department of Finance ( email )

Lincoln, NE 68588-0490
United States

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