We show that mutual funds employ portfolio strategies based on market sentiment. We build a proxy for the degree of a fund’s sentiment beta (or FSB). The low FSB funds outperform high FSB funds, even after controlling for standard risk factors and fund characteristics. This effect is sizable and delivers a net-of-risk performance of 3.8% per year. Funds with lower FSB follow more idiosyncratic strategies, suggesting that FSB is deliberate active choice of the fund manager. A sentiment contrarian strategy leads to high flows due to its superior performance, whereas a sentiment catering strategy fails to attract significant investor flows. Link to the article
MASSIMO, M. and YADAV, V. (2015). Investor Sentiment and Mutual Fund Strategies. Journal of Financial and Quantitative Analysis, 50(4), pp. 699-727.