Uncommon Value: The Investment Performance of Contrarian Funds

This paper studies the investment behavior and performance of contrarian mutual funds, as well as the performance of stocks widely held and traded by such funds over the 1994 to 2006 period. We define a “contrarian fund” as a fund that trades in a direction opposite to mutual fund “herds” much more frequently than the average fund. We find that contrarian funds tend to persist in trading against the herd over time, and that they outperform herding funds by more than 2.6% per year, both before and after fund expenses. We further find that a valueweighted portfolio of stocks widely held by contrarian funds (relative to herding funds) outperform stocks least widely held by contrarian funds over the following four quarters by more than 5%, adjusted for the stock characteristics. Finally, we investigate whether contrarian funds outperform simply because they provide liquidity to herding funds, or whether they possess superior information on stock fundamentals. We find some evidence that at least part of the superior returns of contrarian funds derives from their superior information, relative to herding funds—contrarian funds avoid holding stocks with worsening profitability much more successfully than herding funds.