Global Equity Fund Performance, Portfolio Concentration, and the Fundamental Law of Active Management

42 Pages Posted: 18 Aug 2009 Last revised: 25 May 2010

See all articles by Joop Huij

Joop Huij

Erasmus University - Rotterdam School of Management; Robeco; Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

Jeroen Derwall

Maastricht University - European Centre for Corporate Engagement; Maastricht University - Department of Finance; The Open University of the Netherlands

Multiple version iconThere are 2 versions of this paper

Date Written: August 17, 2009

Abstract

This paper investigates the relation between portfolio concentration and the performance of global equity funds. Concentrated funds with higher levels of tracking error display better performance than their more broadly diversified counterparts. We show that the observed relation between portfolio concentration and performance is mostly driven by the breadth of the underlying fund strategies; not just by fund managers’ willingness to take big bets. Our results indicate that when investors strive to select the best performing funds, they should not only consider fund managers’ tracking error levels. It is of greater importance that they take into account the extent to which fund managers carefully allocate their risk budget across multiple investment strategies and have concentrated holdings in multiple market segments simultaneously.

Keywords: global fund performance, portfolio concentration, active management

JEL Classification: G11, G12, G14

Suggested Citation

Huij, Joop and Derwall, Jeroen, Global Equity Fund Performance, Portfolio Concentration, and the Fundamental Law of Active Management (August 17, 2009). ERIM Report Series Reference. Available at SSRN: https://ssrn.com/abstract=1456352 or http://dx.doi.org/10.2139/ssrn.1456352

Joop Huij (Contact Author)

Erasmus University - Rotterdam School of Management ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

HOME PAGE: http://www.rsm.nl/jhuij

Robeco

Rotterdam, 3014DA
Netherlands

HOME PAGE: http://www.robeco.com/

Erasmus University Rotterdam (EUR) - Erasmus Research Institute of Management (ERIM)

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

Jeroen Derwall

Maastricht University - European Centre for Corporate Engagement ( email )

FEBA
Tongersestraat 53
Maastricht, Limburg 6200MD
Netherlands

HOME PAGE: http://www.corporate-engagement.com/

Maastricht University - Department of Finance ( email )

Maastricht, 6200 MD
Netherlands

HOME PAGE: http://www.fdewb.unimaas.nl/finance/?page=member&id=175

The Open University of the Netherlands

Valkenburgerweg 177
Heerlen, NL-6401DL
Netherlands

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