Does Portfolio Concentration Affect Performance? Evidence from Corporate Bond Mutual Funds
59 Pages Posted: 6 Sep 2017 Last revised: 30 Jun 2021
Date Written: November 1, 2017
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
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