Hostname: page-component-cc8bf7c57-hbs24 Total loading time: 0 Render date: 2024-12-11T04:57:36.405Z Has data issue: false hasContentIssue false

Investor Sentiment and Mutual Fund Strategies

Published online by Cambridge University Press:  13 November 2015

Massimo Massa
Affiliation:
massimo.massa@insead.edu, INSEAD, 77305 Fontainebleau Cedex, France
Vijay Yadav*
Affiliation:
yadav@essec.edu, ESSEC Business School, Singapore 188064, Singapore.
*
*Corresponding author: yadav@essec.edu

Abstract

We show that mutual funds employ portfolio strategies based on market sentiment. We build a proxy for the degree of a fund’s sentiment beta (or FSB). The low-FSB funds outperform high-FSB funds, even after controlling for standard risk factors and fund characteristics. This effect is sizable and delivers a net-of-risk performance of 3.8% per year. Funds with a lower FSB follow more idiosyncratic strategies, suggesting that FSB is a deliberate, active choice of the fund manager. A sentiment contrarian strategy leads to high flows due to its superior performance, whereas a sentiment catering strategy fails to attract significant investor flows.

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Amihud, Y., and Goyenko, R.. “Mutual Fund’s R 2 as Predictor of Performance.” Review of Financial Studies, 26 (2013), 667694.CrossRefGoogle Scholar
Baker, M., and Wurgler, J.. “Investor Sentiment and the Cross-Section of Stock Returns.” Journal of Finance, 61 (2006), 16451680.Google Scholar
Baker, M., and Wurgler, J.. “Investor Sentiment in the Stock Market.” Journal of Economic Perspectives, 2 (2007), 129152.Google Scholar
Brunnermeier, M. K., and Nagel, S.. “Hedge Funds and the Technology Bubble.” Journal of Finance, 59 (2004), 20132040.Google Scholar
Buffett, W. “The 2001 Chairman’s Letter.” Berkshire Hathaway Inc. (Feb. 28, 2001), http://www.berkshirehathaway.com/letters/2001.html (accessed on Feb. 25, 2013).Google Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 5782.Google Scholar
De Long, J. B.; Shleifer, A.; Summers, L. H.; and Waldmann, R.. “Noise Trader Risk in Financial Markets.” Journal of Political Economy, 98 (1990), 703738.Google Scholar
Fama, E., and French, K.. “The Cross-Section of Expected Stock Return.” Journal of Finance, 47 (1993), 427465.Google Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return, and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607636.Google Scholar
Frazzini, A., and Lamont, O.. “Dumb Money: Mutual Fund Flows and Cross-Section of Stock Returns.” Journal of Financial Economics, 88 (2008), 299322.Google Scholar
Frisch, R., and Waugh, F. V.. “Partial Time Regressions as Compared with Individual Trends.” Econometrica, 1 (1933), 387401.CrossRefGoogle Scholar
Horowitz, J. “TD Ameritrade Creates Investor Sentiment Index” (Jan. 8, 2013), http://www.reuters.com/article/2013/01/08/us-tdameritrade-index-idUSBRE90715020130108 (accessed on Feb. 25, 2013).Google Scholar
Lee, C. “Internet Funds Flame Out Amid Stocks’ Blazing Rally.” Wall Street Journal Interactive Edition (Mar. 20, 1998), http://online.wsj.com/article/SB890172049608484500.html (accessed on Feb. 25, 2013).Google Scholar
Mitchell, M., and Pulvino, T.. “Characteristics of Risk and Return in Risk Arbitrage.” Journal of Finance, 56 (2001), 21352175.CrossRefGoogle Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703708.Google Scholar
Sirri, E., and Tufano, P.. “Costly Search and Mutual Fund Flows.” Journal of Finance, 53 (1998), 15891622.Google Scholar
Solomon, D. H.; Soltes, E. F.; and Sosyura, D.. “Winners in the Spotlight: Media Coverage of Fund Holdings as a Driver of Flows.” Journal of Financial Economics, 113 (2014), 5372.CrossRefGoogle Scholar
Stambaugh, R. F.; Yu, J.; and Yuan, Y.. “The Short of It: Investor Sentiment and Anomalies.” Journal of Financial Economics, 104 (2012), 288302.Google Scholar
Wurgler, J. “Investor Sentiment Data (Annual and Monthly).” Available at http://people.stern.nyu.edu/jwurgler/ (accessed on July 1, 2007).Google Scholar