1. 2016 CIFR Conference 1 Uncommon Value: The Investment Performance of Contrarian Funds Kelsey Wei, University of Texas, Dallas Russ Wermers, University of Maryland Tong Yao, University of Iowa

2. 2013 FIRS Conference2 Why Study Contrarian Funds? Academic researchers have mostly focused on institutional herding behaviors (e.g., Grinblatt, Titman, and Wermers, 1995; Wermers, 1999; and Sias, 2004) Fund managers making daring moves against the crowd are often either star managers or spectacular losers Why would some funds tend to invest “differently”?

3. 2013 FIRS Conference3 Potential Rationale for Being Contrarian Contrarians may be  less career concerned (Scharfstein and Stein, 1990) outperforming  low-skilled or agency-prone managers who tend to engage in risk-shifting (Brown et al., 1996; Chevalier and Ellison,1997; Huang, Sialm and Zhang, 2012) underperforming  Be overconfident in their private information (Daniel, Hirshleifer, and Subrahmanyan, 1998) underperforming

4. Main Objectives of This Study To determine the motivation behind contrarian investing behaviors To examine whether contrarian behaviors are associated with superior skills To determine the sources of performance differences between contrarian funds and herding fund 2013 FIRS Conference4

5. 5 Main Findings Contrarian funds persistently trade against herding funds. They typically have greater recent success in terms of performance and flows contrarian funds outperform their herding counterparts, before and after fees  They possess superior private information as well as benefitting from the return reversals caused by mutual fund herding a long-short portfolio based on the degree is stock is invested by contrarian funds generates a quarterly abnormal return of 0.47%

6. 2013 FIRS Conference6 How to Identify Contrarian Funds? Possible approaches:  Buying stocks with falling prices (trading against price momentum)  Using quantitative value-oriented strategies (e.g, buying high BM stocks) Our simple approach: the degree to which a fund trades against the crowd  Contrarian: an investor who buys shares of stock when most others are selling and sells when others are buying (Merriam-Webster’s Online Dictionary)

7. 2013 FIRS Conference7 Our Approach: measuring herding First, we measure stock-level herding using the LSV (1992) herding measure: Conditional buy- and sell-herding measures: total buys/total trades Proportion of buys across all trades in t Adjustment factor for random variation around expectation

8. 2013 FIRS Conference8 Our Approach: measuring contrarian trading Next, we rank stocks into quintiles, separately for BHM and SMH stocks (-5 to 5 ranking, HERD=5 for strong buy-herding and HERD=-5 for strong sell-herding) Quarterly trade-weighted contrarian index for each fund: CON is bounded between -5 and 5 with 5 (-5) indicating strong contrarian (herding) funds Where  ijt being the standardized dollar value of stock i held by fund j at the end of quarter t,

9. 2013 FIRS Conference9 Data Quarterly portfolio holdings for all domestic-equity mutual funds between 1995 and 2008 from Thompson Reuters Fund returns and characteristics from CRSP and Morningstar Matching Thomson data with CRSP data using MFLINK from WRDS Individual stock returns and financial information from CRSP and Compustat

10. 2013 FIRS Conference10 Characteristics of Contrarian Funds (T2)

11. Contrarianism versus Strategy Activeness Contrarian index measures the extent a fund trades against the crowd “Strategy Activeness” reflects the extent a fund deviates from factors or benchmarks The relations between contrarian index and strategy uniqueness measures are non- monotonic Herding and contrarian funds tend to have very similar “Strategy Activeness” measures. 2013 FIRS Conference11

12. Characteristics of Contrarian Funds 2013 FIRS Conference12

13. Comparing Performance of Herding Vs. Contrarian Funds 2013 FIRS Conference13

14. How do Contrarian Funds Achieve their Superior Returns? Countering fund herds which tend to result in significant temporary price pressure and return reversals (Dasgupta et al. 2011, Brown et al. 2013)  abnormal returns to be mostly concentrated in stocks heavily bought or sold by fund herds  Contrarian trades should only exhibit positive alphas when the trades of herding funds exhibit negative alphas 2013 FIRS Conference14

15. How do Contrarian Funds Achieve their Superior Returns? Superior information that is independent of that of the crowd:  Contrarian funds should earn positive alphas whether they trade with or against mutual fund herds.  abnormal returns of contrarian funds should not particularly depend on the performance of herding funds 2013 FIRS Conference15

16. Trade Based Performance of Contrarian Funds (T4) 2013 FIRS Conference16

17. Trade Based Performance of Contrarian Funds (T4) 2013 FIRS Conference17

18. 2013 FIRS Conference18 Multivariate Tests (Table 5) How are contrarian funds’ alphas related to fund characteristics?  Fund size  Fund expenses  Fund age  Flows  Characteristics of holdings  Portfolio strategy activeness

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20. 2013 FIRS Conference20 A Stock Level Analysis Approach Since contrarian funds have better stock-picking abilities, the degree to which a stock is owned by contrarian funds should reflect information about the stock’s future performance Transforming the fund level contrarian index into a stock level investment signal—Contrarian Score (Wermers, Yao and Zhao, 2012) The stock-level contrarian score serves as a “magnifying glass” to analyze the stock selection information contrarian fund managers possess

21. 2013 FIRS Conference21 Contrarian Scores and the Cross Section of Stock Returns

22. 2013 FIRS Conference22 Contrarian Scores and Stock Characteristics

23. 2013 FIRS Conference23 Abnormal Returns Due to Liquidity Provision versus stock picking information … …...

24. 2013 FIRS Conference24 Summary Contrarian fund managers tend to have greater recent performance and are thus less career concerned. Contrarian funds outperform herding funds Contrarian funds not only profit from the mispricing caused by herding funds, they also have superior ability to select stocks Stocks held predominantly by contrarian funds outperform stocks held by herding funds