Global Equity Fund Performance, Portfolio Concentration, and the Fundamental Law of Active Management
42 Pages Posted: 18 Aug 2009 Last revised: 25 May 2010
Date Written: August 17, 2009
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: Suggested Citation