Portfolio Concentration and Mutual Fund Performance
56 Pages Posted: 15 Aug 2016 Last revised: 1 Dec 2017
Date Written: December 1, 2017
Mutual fund managers should choose to increase the concentration of their portfolio when they possess information of great enough expected value to offset the risks of increased concentration. Consistent with that idea, we find that fund performance improves after concentration increases. Because the riskiness of increased concentration varies between funds and over time, the expected value of the information required by managers before choosing to increase concentration should also vary. Among other results, we show that the concentration-performance relation is stronger for funds with less institutional ownership and when investor sentiment is low.
Keywords: Mutual fund, alpha, concentration, information, skill
JEL Classification: G20
Suggested Citation: Suggested Citation