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Security Concentration and Active Fund Management: Do Focused Funds Offer Superior Performance?

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  • Travis Sapp
  • Xuemin (Sterling) Yan

Abstract

We examine gross fund returns based on the number of securities held and find no evidence that focused funds outperform diversified funds. After deducting expenses, focused funds significantly underperform. Controlling for various fund characteristics, fund performance is positively related to the fund's number of holdings both before and after expenses. We find evidence linking focused fund underperformance to agency and liquidity problems. Finally, the attrition rate of focused funds is higher than that of diversified funds. These results do not support the view that managers holding focused portfolios have superior stock‐picking skills or that focused funds provide value to investors.

Suggested Citation

  • Travis Sapp & Xuemin (Sterling) Yan, 2008. "Security Concentration and Active Fund Management: Do Focused Funds Offer Superior Performance?," The Financial Review, Eastern Finance Association, vol. 43(1), pages 27-49, February.
    • Handle: RePEc:bla:finrev:v:43:y:2008:i:1:p:27-49
    DOI: 10.1111/j.1540-6288.2007.00185.x
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    Cited by:

    1. Pei-I Chou & Chia-Hao Lee, 2012. "Is Concentration a Good Idea? Evidence from Active Fund Management," Asia-Pacific Financial Markets, Springer;Japanese Association of Financial Economics and Engineering, vol. 19(1), pages 23-41, March.
    2. Abhay Kaushik & Douglas E. Brinckman & Clarence C. Rose, 2013. "Performance Evaluation and Fund Selection Criteria for Mutual Funds over the Period 2000-2011," Accounting and Finance Research, Sciedu Press, vol. 2(3), pages 111-111, August.
    3. Hiraki, Takato & Liu, Ming & Wang, Xue, 2015. "Country and industry concentration and the performance of international mutual funds," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 297-310.
    4. Jin-Li Hu & Tzu-Pu Chang & Ray Chou, 2014. "Market conditions and the effect of diversification on mutual fund performance: should funds be more concentrative under crisis?," Journal of Productivity Analysis, Springer, vol. 41(1), pages 141-151, February.
    5. Darren D. Lee & Jacquelyn E. Humphrey & Karen L. Benson & Jason Y. K. Ahn, 2010. "Socially responsible investment fund performance: the impact of screening intensity," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 50(2), pages 351-370, June.
    6. Hong‐Yi Chen & Pin‐Huang Chou & Chia‐Hsun Hsieh, 2018. "Persistency of the momentum effect," European Financial Management, European Financial Management Association, vol. 24(5), pages 856-892, November.
    7. Ding, Haoyuan & Zheng, Huanhuan & Zhu, Chenqi, 2015. "Equity funds in emerging Asia: Does size matter?," International Review of Economics & Finance, Elsevier, vol. 35(C), pages 149-165.
    8. Zhang, Ning & Zhang, Yue & Zong, Zhe, 2023. "Fund ESG performance and downside risk: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 86(C).
    9. Qin, Nan & Wang, Ying, 2021. "Does portfolio concentration affect performance? Evidence from corporate bond mutual funds," Journal of Banking & Finance, Elsevier, vol. 123(C).
    10. Fulkerson, Jon A. & Riley, Timothy B., 2019. "Portfolio concentration and mutual fund performance," Journal of Empirical Finance, Elsevier, vol. 51(C), pages 1-16.
    11. Hiraki, Takato & Liu, Ming, 2021. "Do global equity mutual funds exhibit home bias?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 31(C).
    12. Jon A. Fulkerson & Timothy B. Riley, 2017. "Mutual Fund Liquidity Costs," Financial Management, Financial Management Association International, vol. 46(2), pages 359-375, June.

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