Pension Fund Equity Performance: Herding Does Not Pay Off

Abstract

I use proprietary data on equity holdings to show that Dutch pension funds herd in individual securities. I introduce a pension fund-level measure of herding that identifies the extent to which a pension fund follows other pension funds into and out of the same securities over time. I show that pension funds that herd underperform pension funds that do not herd by 1.32% on an annual basis that indicates herding has a negative impact on performance. Small pension funds and pension funds that trade less frequently are more likely to herd. These pension funds herd consistently over time, hence they appear to make this decision strategically out of reputational concerns.