Security Concentration and Active Fund Management: Do Focused Funds Offer Superior Performance?

23 Pages Posted: 29 Jan 2008

See all articles by Travis Sapp

Travis Sapp

Iowa State University - Department of Finance

Xuemin (Sterling) Yan

affiliation not provided to SSRN

Multiple version iconThere are 3 versions of this paper

Abstract

We examine gross fund returns based on the number of securities held and find no evidence that focused funds outperform diversified funds. After deducting expenses, focused funds significantly underperform. Controlling for various fund characteristics, fund performance is positively related to the fund's number of holdings both before and after expenses. We find evidence linking focused fund underperformance to agency and liquidity problems. Finally, the attrition rate of focused funds is higher than that of diversified funds. These results do not support the view that managers holding focused portfolios have superior stock-picking skills or that focused funds provide value to investors.

Suggested Citation

Sapp, Travis and Yan, Xuemin (Sterling), Security Concentration and Active Fund Management: Do Focused Funds Offer Superior Performance?. Financial Review, Vol. 43, Issue 1, pp. 27-49, February 2008. Available at SSRN: https://ssrn.com/abstract=1087642 or http://dx.doi.org/10.1111/j.1540-6288.2007.00185.x

Travis Sapp (Contact Author)

Iowa State University - Department of Finance ( email )

3362 Gerdin Business Bldg.
Ames, IA 50011-1350
United States
515-294-2717 (Phone)
515-294-3525 (Fax)

Xuemin (Sterling) Yan

affiliation not provided to SSRN

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