We thank Arnie Cowan (the editor) and two anonymous referees for helpful comments. Editor's note: The referee selection and primary editorial decision were made by Advisory Editor Doug Emery.
Security Concentration and Active Fund Management: Do Focused Funds Offer Superior Performance?
Article first published online: 25 JAN 2008
2008, The Eastern Finance Association
Volume 43, Issue 1, pages 27–49, February 2008
How to Cite
Sapp, T. and Yan, X. (2008), Security Concentration and Active Fund Management: Do Focused Funds Offer Superior Performance?. Financial Review, 43: 27–49. doi: 10.1111/j.1540-6288.2007.00185.x
- Issue published online: 25 JAN 2008
- Article first published online: 25 JAN 2008
- mutual fund performance;
- focused fund;
- security concentration;
- best ideas
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.