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

The Financial Review, Vol. 43, No. 1, pp. 27-49, February 2008

36 Pages Posted: 11 Aug 2009

See all articles by Travis Sapp

Travis Sapp

Iowa State University - Department of Finance

Xuemin Sterling Yan

University of Missouri - Columbia

Multiple version iconThere are 3 versions of this paper

Date Written: August 1, 2007

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.

Keywords: mutual fund performance, focused fund, security concentration, best ideas

JEL Classification: G11, G20

Suggested Citation

Sapp, Travis and Yan, Xuemin Sterling, Security Concentration and Active Fund Management: Do Focused Funds Offer Superior Performance? (August 1, 2007). The Financial Review, Vol. 43, No. 1, pp. 27-49, February 2008. Available at SSRN: https://ssrn.com/abstract=1446443

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

University of Missouri - Columbia ( email )

Robert J. Trulaske Sr. College of Business
427 Cornell Hall
Columbia, MO 65211-2600
United States
573-884-9708 (Phone)
573-884-6296 (Fax)

HOME PAGE: http://business.missouri.edu/yanx/

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