Active fund managers who attempt to copy the investment strategies of better-performing rivals directly have little chance of repeating their success.
According to a study by Cambridge university looking at the performance of US mutual funds between 1991 and 2013, those managers that mimic successful funds only benefited from a short-term boost in performance, while a significant performance gap emerged over the longer term.
Professors at Cambridge Judge Business School found copycat funds were typically distressed vehicles that adopted mimicking behaviour in an effort to reverse underperformance or stem investor redemptions.
Professor Raghavendra Rau said portfolio mimicking was more prevalent between 1991 and 1999, when approximately 50 funds annually appeared to use a copycat strategy.
“Copying is not a viable trading strategy,” he said. “Those that do [copy], do so out of desperation.”
Periods of higher market volatility and phases of strong aggregate inflows into equity funds increased the incentives to copy. Funds targeted by copycats had strong past performance and were highly ranked by rating agencies.
Prof Rau said that fund managers were “uniquely well placed” to assess their rivals, possessing expertise and access to private information about their peers that was not available to ordinary investors.
The study also found that important changes to US fund rules had a marked effect on copycat behaviour.
In 2000, US regulators enforced that fund managers could no longer privately disclose material information to financial analysts, which reduced the information advantage enjoyed by larger fund groups that had better relationships with investment banks.
As a result, the study found that the number of copycats funds decreased markedly, averaging 11 funds annually between 2000 and 2003.
A second rule change, introduced in 2004, required mutual funds to disclose their portfolio holdings four times a year, up from two previously. Some managers at the time objected and said that this would create more opportunities for copycats, free-riders and frontrunners to exploit.
According to the Cambridge university research, the change was followed by a rise in the number of copycats funds, which averaged 19 annually between 2004 and 2013.
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