Common Holdings and Mutual Fund Performance
45 Pages Posted: 14 Sep 2019
Date Written: August 5, 2019
This paper studies the relationship between U.S. mutual funds' common holdings and fund performance. In a network where funds are connected through portfolio overlap, degree centrality of each fund represents the level of similarity with peers. The results show that holdings similarity leads to lower abnormal fund returns. Further tests suggest that information asymmetry is a potential explanation for this relationship. The negative association between holdings similarity and fund performance widens in volatile markets. In uncertain times, mutual funds move towards their benchmark due to asset management constraints. This creates negative price pressure on commonly held assets. A portfolio based on stocks owned by low vs. high degree centrality funds yields abnormal returns of 7% per year. This paper provides new evidence of the informational advantage hypothesis as a driver of fund performance. It also highlights negative externalities of asset management contracts.
Keywords: Common Holdings, Portfolio Similarity, Financial Networks, Mutual Funds
JEL Classification: G11, G23
Suggested Citation: Suggested Citation