Exploring Style Herding by Mutual Funds

We study intentional herding in investment styles by mutual funds, and its consequences. We find that style herding is significant and persistent, especially for active funds. Herding tends to increase after periods of high market volatility and decrease with sentiment, consistent with the intentional character of herding. Furthermore, we find that herding is related to changes in market dynamics. Finally, we find that style herding tends to reduce flows, whereas it does not affect mutual funds’ performance. Overall, the results illustrate that intentional herding in styles is prevalent and has important consequences for both market dynamics and fund managers and investors