Does Portfolio Concentration Affect Performance? Evidence from Corporate Bond Mutual Funds

59 Pages Posted: 6 Sep 2017 Last revised: 15 Dec 2020

See all articles by Nan Qin

Nan Qin

College of Business, Northern Illinois University

Ying Wang

State University of New York at Albany - School of Business

Date Written: November 1, 2017

Abstract

This paper examines the relation between portfolio concentration and investment performance in corporate bond mutual funds. Using detailed holdings data, we construct portfolio concentration measures at the firm, industry, and credit rating levels. We find that portfolio concentration is significantly positively related to expected abnormal returns of corporate bond funds, and this relation is mainly driven by investment-grade funds. High-yield funds, however, do not exhibit such a relation, possibly due to the erosion of the value of portofio concentration by liquidity costs. In support of this conjecture, we document that the concentration-performance relation is less pronounced among funds with higher sensitivities to market-wide illiquidity innovations and during periods of bond market illiquidity shocks and fund-level net money outflows. Finally, we show that more concentrated funds demonstrate stronger performance persistence, and investors appear to consider portfolio concentration in making investment decisions.

Keywords: Portfolio concentration, corporate bond fund performance, fund holdings, liquidity costs, bond market illiquidity, performance persistence

Suggested Citation

Qin, Nan and Wang, Ying, Does Portfolio Concentration Affect Performance? Evidence from Corporate Bond Mutual Funds (November 1, 2017). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3031735 or http://dx.doi.org/10.2139/ssrn.3031735

Nan Qin

College of Business, Northern Illinois University

1425 W. Lincoln Hwy.
DEKALB, IL 60115
United States

Ying Wang (Contact Author)

State University of New York at Albany - School of Business ( email )

1400 Washington Ave.
Albany, NY 12222
United States

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