Momentum Investment Strategies, Portfolio Performance, and Herding: A Study of Mutual Fund Behavior
University of California, Los Angeles (UCLA) - Finance Area; Yale University - International Center for Finance; National Bureau of Economic Research (NBER)
University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)
University of Maryland - Robert H. Smith School of Business
We examine the investment strategies of 155 mutual funds over the 1975-84 period to determine the extent to which the funds purchased stocks based on their past returns, and to determine the relation of this behavior to their observed portfolio performance. We find that about 77% of these mutual funds were "momentum investors", buying stocks that were past winners; however, they did not systematically sell past losers. On average, these "trend-followers" realized significantly better performance than the remaining funds. We also find that the mutual funds exhibited herding behavior, and that the tendency of a fund to herd in its trades was strongly correlated with its tendency to buy past winners as well as with its portfolio performance. Consistent with the evidence on trend-following, herding into past winners was stronger than herding into past losers.
JEL Classification: G10
Date posted: September 7, 1999