ABSTRACT
The active share of mutual funds drops significantly when investor sentiment is high, indicating that fund managers reduce their active stock selection and stay closer to their benchmarks during such periods. Our evidence is consistent with fund managers being sentiment-prone – challenging the conventional view that it is only the preponderance of retail investors during high sentiment periods that allows sentiment to influence asset prices.
Acknowledgments
We thank an anonymous referee, Allaudeen Hameed, Chuan Yang Hwang, Marcin Kacperczyk, and Kalok Chan for helpful comments, Manhong Chan for able research assistance, and the General Research Fund of the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. 15501017) for research support.
Disclosure statement
No potential conflict of interest was reported by the author(s).