The Relationship between Herding and Skill – A Study of the Swedish Mutual Fund Industry

Abstract: The aim of the present thesis is to examine the presence of herding behavior among Swedish fund managers. It is further investigated whether herding is a sign of sophistication, or strictly a behavioral phenomenon. Strong evidence of small levels of fund herding on the Swedish mutual fund market is found. Managers who engage in moderate herding behavior can generate abnormal gross returns in the short run but fail to cover for fees and expenses. In contrast, we find weak evidence of antiherding funds being able to consistently generate net abnormal returns in the long run. Furthermore, fund managers who exhibit moderate antiherding behavior seem to possess superior stock picking ability. Finally, stocks bought by herds are shown to underperform stocks sold by herds in the short run. In conclusion, herding on the Swedish mutual fund market cannot be attributed to sophistication since herding funds do not generate significant abnormal net returns, regardless of the time perspective. This infers, in turn, that herding is a strictly behavioral phenomenon caused by reputational concerns or behavioral biases. Our results further indicate that sophistication may reside with moderately contrarian managers.