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
Date Written: August 1, 2007
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: Suggested Citation