Whether a stock was sold for a gain or a loss has a significant impact on an active mutual fund manager’s decision to repurchase the stock. Stocks sold for a gain (winner stocks) are 17% more likely to be repurchased than those sold for a loss (loser stocks).

The effect is known as repurchasing bias. Realizing a gain or a loss generates positive or negative emotions. These emotions influence future investment decisions. Repurchasing bias has previously been documented among individual investors; a newer study shows mutual fund managers succumb to it as well.

The probability of a stock being repurchased by a mutual fund within one of year of being sold is 5.2% on average. The odds increase by 1.2% if the stock was a previous winner as opposed to being a previous loser.

The relationship is asymmetric. There is no link between the size of the gain and the likelihood of being repurchased. The magnitude of the loss does impact the probability of being repurchased, however. Stocks are less likely to be repurchased as the size of the loss realized increases.

How a stock has performed after being sold also plays a role. A post-sale gain decreases the probability of repurchase by 1.1% to 1.2% relative to a winner stock whose price declined after having been previously sold. Explaining the results, the study’s authors write, “The negative marginal effect of an increasing price after sale amounts to 75% of the difference, which is economically significant.”

Concerning the type of fund, those using team managers—as opposed to a solo manager—were 25% more likely to repurchase previous winner stocks than loser stocks. This finding was viewed as a sign that group decision-making “exacerbates the influence of fund managers’ repurchasing bias.”

Repurchased winner stocks lag the returns of repurchased loser stocks by 5.35% on annualized bias. The overall impact on fund performance appears to be negative, though the evidence was described as being “weak.” This is likely due to the impact of other stocks held in the portfolio.

The study examined quarterly stock holdings of approximately 4,400 actively managed U.S. mutual funds for the period of 1980 through 2014. The sample excluded index funds, exchange-traded funds and funds ranking in the bottom 5% of asset size.

Source: “Stock Repurchasing Bias of Mutual Funds;” Mengqiao Du, Alexandra Niessen-Ruenzi and Terrance Odean; SSRN, September 2018.