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Investor Sentiment and Mutual Fund Strategies

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  • Massa, Massimo
  • Yadav, Vijay

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.

Suggested Citation

  • Massa, Massimo & Yadav, Vijay, 2015. "Investor Sentiment and Mutual Fund Strategies," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 50(4), pages 699-727, August.
    • Handle: RePEc:cup:jfinqa:v:50:y:2015:i:04:p:699-727_00
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    Cited by:

    1. Arbab Khalid Cheema & Wenjie Ding & Qingwei Wang, 2023. "The cross-section of January effect," Journal of Asset Management, Palgrave Macmillan, vol. 24(6), pages 513-530, October.
    2. Qifei Zhu, 2020. "The Missing New Funds," Management Science, INFORMS, vol. 66(3), pages 1193-1204, March.
    3. Yiannis Karavias & Stella Spilioti & Elias Tzavalis, 2021. "Investor sentiment effects on share price deviations from their intrinsic values based on accounting fundamentals," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1593-1621, May.
    4. Padma Kadiyala, 2022. "Response of ETF flows and long-run returns to investor sentiment," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 36(4), pages 489-531, December.
    5. Wagner, Moritz & Lee, John Byong-Tek & Margaritis, Dimitris, 2022. "Mutual fund flows and seasonalities in stock returns," Journal of Banking & Finance, Elsevier, vol. 144(C).
    6. Ford, Jansson M. & Gehricke, Sebastian A. & Zhang, Jin E., 2022. "Option traders are concerned about climate risks: ESG ratings and short-term sentiment," Journal of Behavioral and Experimental Finance, Elsevier, vol. 35(C).
    7. Xufeng Liu & Die Wan, 2022. "Does short‐selling affect mutual fund shareholdings? Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1887-1923, April.
    8. Feng Dong, 2020. "Noise-driven abnormal institutional investor attention," Journal of Asset Management, Palgrave Macmillan, vol. 21(5), pages 467-488, September.
    9. Supramono Supramono & Widhiastuti Wilis & I. Utami, 2017. "Market Reaction to Cabinet Reshuffle: The Indonesian Evidence," International Journal of Economics and Financial Issues, Econjournals, vol. 7(5), pages 183-188.
    10. Wu, Xiting & Jiang, Haiyan & Lin, Hui & You, Jiaxing, 2023. "Why Muddy the Water? Short selling and the disclosure of proprietary information," The British Accounting Review, Elsevier, vol. 55(4).
    11. Kaniel, Ron & Lin, Zihan & Pelger, Markus & Van Nieuwerburgh, Stijn, 2023. "Machine-learning the skill of mutual fund managers," Journal of Financial Economics, Elsevier, vol. 150(1), pages 94-138.
    12. Paudel, Shishir & Silveri, Sabatino (Dino) & Wu, Mark, 2022. "Investor sentiment and asset prices: Evidence from the ex-day," Journal of Banking & Finance, Elsevier, vol. 139(C).
    13. Gehde-Trapp, Monika & Klingler, Linda, 2022. "The effect of sentiment on institutional investors: A gender analysis," CFR Working Papers 22-08, University of Cologne, Centre for Financial Research (CFR).
    14. Casavecchia, Lorenzo, 2016. "Fund managers' herding and the sensitivity of fund flows to past performance," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 205-221.
    15. Jian Wang & Yanhuang Huang & Hongrui Feng & Jun Yang, 2023. "The effect of customer concentration on stock sentiment risk," Review of Quantitative Finance and Accounting, Springer, vol. 60(2), pages 565-606, February.
    16. Erdemlioglu, Deniz & Joliet, Robert, 2019. "Long-term asset allocation, risk tolerance and market sentiment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 62(C), pages 1-19.
    17. Ngoc Bao Vuong, Yoshihisa Suzuki, 2020. "Does Fear has Stronger Impact than Confidence on Stock Returns?The Case of Asia-Pacific Developed Markets," Analele Stiintifice ale Universitatii "Alexandru Ioan Cuza" din Iasi - Stiinte Economice, Alexandru Ioan Cuza University, Faculty of Economics and Business Administration, vol. 67, pages 157-175, July.
    18. Yi, Shangkun & Wang, Jian & Wang, Xiaoting & Feng, Hongrui, 2022. "CEO political connection and stock sentiment beta: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).
    19. Islam, Mohd. Anisul, 2021. "Investor sentiment in the equity market and investments in corporate-bond funds," International Review of Financial Analysis, Elsevier, vol. 78(C).
    20. Qiang Bu & Odd J. Stalebrink, 2020. "Can fund sentiment beta predict future performance?," Journal of Asset Management, Palgrave Macmillan, vol. 21(6), pages 524-534, October.
    21. Feng Dong, 0. "Noise-driven abnormal institutional investor attention," Journal of Asset Management, Palgrave Macmillan, vol. 0, pages 1-22.

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