Author

  • Prince K. Sarpong

    • University of KwaZulu-Natal, Durban, South Africa
    • South Africa

  • Mabutho Sibanda

    • University of KwaZulu-Natal, Durban, South Africa
    • South Africa

Abstract

This study seeks to investigate herd behaviour among equity mutual fund managers and the performance of mutual funds that trade against the herd in South Africa. The behaviour of mutual funds has an effect on the stability and volatility of stock markets, the ultimate returns to the investors. The study builds upon the efficient market hypothesis, portfolio theory and behavioural finance to provide evidence of the behaviour of mutual funds in an emerging market context using the Johannesburg Stock Exchange. The Lakonishok, Shleifer and Vishney (1991) measure of herding is used to ascertain the behaviour of mutual funds over the period 2006 to 2012. Institutional investors in South Africa are susceptible to the behavioural bias of herding and this phenomenon influences the performance of their funds. Funds that trade in the opposite direction of herd funds are able to put up a superior performance over time. Superior performance, however, does not entice mutual fund investors to invest less in under-performing funds and more in funds that recently show superior performance. These findings imply that following investment waves does not culminate in superior returns in the stock market. Consequently, mutual funds that take an opposite direction to herd funds help stabilize the stock market and lessen the severity of bear markets. This study categorizes mutual funds into ‘herding’ and ‘contrarian’ and provides an insight into the performance of each category. Investors who oppose herd behaviour realize greater returns over time while stabilizing the markets at the same time.

Keywords

References

  • Ang, A., Goetzmann, W. & Schaefer, S. (2010). The efficient market theory and evidence: implications for active investment management. Foundations and Trends in Finance, 5(3), 157-242.
  • Baddeley, M., Burke, C., Schultz, W. & Tobler, P. (2012). Herding in financial behaviour: A behavioural and neuroeconomic analysis of individual differences (Cambridge Working Papers in Economics 1225). Cambrige, UK: University of Cambridge.
  • Bowe, M. & Domuta, D. (2004). Investor herding during financial crisis: A clinical study of the Jakarta Stock Exchange. Pacific-Basin Finance Journal, 12(4), 387-418.
  • Brown, K. C., Harlow, W. V. & Starks, L. T. (1996). Of tournaments and temptations: An analysis of managerial incentives in the mutual fund industry. The Journal of Finance, 51(1), 85-110.
  • Chen, G., Rui, O. & Xu, Y. (2003). When will investors herd? Evidence from the Chinese stock markets. Journal of Financial Research, 37, 2-40.
  • Chevalier, J. A. & Ellison, G. D. (1995). Risk taking by mutual funds as a response to incentives(Working Paper No. 5234). Cambridge, MA: National Bureau of Economic Research.
  • Christie, W. G. & Huang, R. D. (1995). Following the Pied Piper: Do individual returns herd around the market? Financial Analysts Journal , 51(4), 31-37.
  • Clare, A. & Thomas, S. (1995). The overreaction hypothesis and the UK stockmarket. Journal of Business Finance & Accounting, 22(7), 961-973.
  • Damodaran, A. (2012). Investment philosophies: Successful strategies and the investors who made them work (2nd ed.). Hoboken, NJ.: Wiley.
  • De Bondt, W. F. & Thaler, R. (1985). Does the stock market overreact? The Journal of Finance, 40(3), 793-805.
  • De Bondt, W. F. & Thaler, R. H. (1987). Further evidence on investor overreaction and stock market seasonality. The Journal of Finance, 42(3), 557-581.
  • De Haan, L. & Kakes, J. (2011). Momentum or contrarian investment strategies: Evidence from Dutch institutional investors. Journal of Banking & Finance, 35(9), 2245-2251.
  • Demirer, R., Kutan, A. M. & Chen, C. D. (2010). Do investors herd in emerging stock markets?: Evidence from the Taiwanese market. Journal of Economic Behavior & Organization, 76(2), 283-295.
  • Dreman, D. (2012). Contrarian investment strategies: The psychological edge.New York: Simon and Schuster.
  • Farber, A., Nguyen, V. & Vuong, Q. (2006). Policy impacts on Vietnam stock market: A case of anomalies and disequilibria 2000-2006. (Universite Libre de Bruxelles CEB Working Paper 06-005.)Brussels, Belgium: Universite Libre de Bruxelles.
  • Fluck, Z., Malkiel, B. G. & Quandt, R. E. (1997). The predictability of stock returns: A cross-sectional simulation. Review of Economics and Statistics, 79(2), 176-183.
  • Gilbertson, B. & Vermaak, C. (1982). The performance of South African mutual funds: 1974-1981. The Investment Analysts Journal, 20, 35-45.
  • Gilmour, S. & Smit, E. (2002). Institutional herding: Evidence from the South African unit trust industry. Investment Analysts Journal, 55(1), 21-35.
  • Grinblatt, M., Titman, S. & Wermers, R. (1995). Momentum investment strategies, portfolio performance, and herding: A study of mutual fund behavior. The American Economic Review , 3, 1088-1105.
  • Gupta-Mukherjee, S. (2012). When active fund managers deviate from their peers: The impact on performance. Unpublished Working Paper. Loyola University.
  • Hall, A. D. (2010). Getting started in mutual funds (2nd ed.). Hoboken, NJ: W iley
  • Haslem, J. (2009). Mutual funds: Risk and performance analysis for decision making. Hoboken, NJ: Wiley.
  • Hu, S. P. (2010). Simple mean, weighted mean, or geometric mean?2010 ISPA/SCEA Professional Development and Training Workshop , San Diego, CA, 8 to 11 June 2010. Santa Barbara, CA: Tecolote Research, Inc.
  • Jensen, M. C. (1968). The performance of mutual funds in the period 1945–1964. The Journal of Finance, 23(2), 389-416.
  • Kahneman, D., Slovic, P. & Tversky, A. (1982). Judgment under uncertainty: Heuristics and biases.Cambridge, UK: Cambridge University Press.
  • Karaban, S. & Maguire, G. (2012). S&P Indices Versus Active Funds Scorecard (SPIVA Australia Scorecard). S&P Dow Jones Indices. Australia: S&P Dow Jones Indices LLC.
  • Lakonishok, J., Shleifer, A. & Vishny, R. W. (1991). Do institutional investors destabilize stock prices? Evidence on herding and feedback trading (NBER Working Paper 3846).Cambridge, MA.: National Bureau of Economic Research.
  • Lakshman, M., Basu, S. & Vaidyanathan, R. (2008). Market-wide herding and the impact of institutional investors in the Indian capital market.(IIM Bangalore Research Paper No. 327). Bangalore: Indian Institute of Management.
  • Lee, B., O’Brien, J. & Sivaramakrishnan, K. (2010). Availability heuristic and observed bias in growth forecasts: Evidence from an analysis of multiple business cycles. In B. Bruce (Ed.), Handbook of Behavioral Finance (pp. 264-286). Cheltenham, UK; Northampton, MA.: Edward Elgar.
  • Lobao, J. & Serra, A. P. (2002). Herding behavior: Evidence from Portuguese mutual funds(Unpublished Working Paper). Instituto de Estudos Financieros e Fiscais, Portugal.
  • Loughran, T. (2012). On David Dreman's contrarian investment strategies: The psychological edge. Journal of Behavioral Finance, 13(3), 163-163.
  • Petersen, R. & Arnstedt, P. (2010). Contrarian investment strategies: An assessment of the value premium in context to recessions. Copenhagen Business School, Department of Finance. Denmark: Institut for Finansiering. Retrieved from http://books.google.co.za/books?id=lMSVtwAACAAJ
  • Prosad, J. M., Kapoor, S. & Sengupta, J. (2012). An examination of herd behavior: An empirical evidence from Indian equity market. International Journal of Trade and Economics Finance, 3(2), 154-157.
  • Quigley, G. & Sinquefield, R. A. (2000). Performance of UK equity unit trusts. Journal of Asset Management, 1(1), 72-92.
  • Scharfstein, D. & Stein, J. (1990). Herd behavior and investment. American Economic Review, 80, 465-479.
  • Schwager, J. D. (1992). The new market wizards: Conversations with America's top traders: New York: Wiley.
  • Schwager, J. D. (2012). The new market wizards: Conversations with America's top tradersHoboken, NJ: Wiley.
  • Sias, R. W. (2004). Institutional herding. Review of Financial Studies, 17(1), 165-206.
  • Sinha, R. & Jog, V. (2007). Fund flows and performance. Canadian Investment Review, 20(2), 28-34.
  • Sonaer, G. (2011). Two essays on mutual fund herding.Unpublished doctoral dissertation, Virginia Polytechnic Institute and State University, Blacksburg, Virginia.
  • Swedroe, L. (2012). Think, act, and invest like Warren Buffett: The winning strategy to help you achieve your financial and life goals.New York: McGraw-Hill.
  • Tan, L., Chiang, T. C., Mason, J. R. & Nelling, E. (2008). Herding behavior in Chinese stock markets: An examination of A and B shares. Pacific-Basin Finance Journal, 16(1), 61-77.
  • Wei, K., Wermers, R. & Yao, T. (2008). Uncommon value: The investment performance of contrarian funds(Working Paper). University of Texas at Dallas, University of Maryland and University of Iowa.
  • Wermers, R. (1999). Mutual fund herding and the impact on stock prices. The Journal of Finance, 54(2), 581622.
  • Wylie, S. (2005). Fund manager herding: A test of the accuracy of empirical results using UK data. The Journal of Business, 78(1), 381-403.
  • Yalçın, K. C. (2010). Market rationality: Efficient market hypothesis versus market anomalies. European Journal of Economic and Political Studies , 3(2), 23-28.

Downloads

No downloads have been recorded for this article yet. Figures appear here once readers begin downloading the full text.

How to Cite

Sarpong, P. K., & Sibanda, M. (2014). Against the Herd: Contrarian Investment Strategies on the Johannesburg Stock Exchange. Journal of Economics and Behavioral Studies, 6(2), 120-129. https://doi.org/10.22610/jebs.v6i2.475

Share this article

License

Copyright (c) 2014 Prince K. Sarpong, Mabutho Sibanda (Author)

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

Author (s) should affirm that the material has not been published previously. It has not been submitted and it is not under consideration by any other journal. At the same time author (s) need to execute a publication permission agreement to assume the responsibility of the submitted content and any omissions and errors therein. After submission of revised paper in the light of suggestions of the reviewers, the editorial team  edits and formats manuscripts to bring uniformity and standardization in published material.

This work will be licensed under Creative Commons Attribution 4.0 International (CC BY 4.0) and under condition of the license, users are free to read, copy, remix, transform, redistribute, download, print, search or link to the full texts of articles and even build upon their work as long as they credit the author for the original work. Moreover, as per journal policy author (s) hold and retain copyrights without any restrictions.

Keywords

Section

Research Paper

Published in

Vol. 6 No. 2 (2014) Tourism, Consumption & Strategic Leadership View issue contents

Published

2014-02-28

Submissions

Have research to publish? Journal of Economics and Behavioral Studies welcomes submissions.

Make a Submission