Do mutual funds with few holdings outperform the market?

This paper investigates the performance of mutual funds that hold a small number of stocks in their portfolio. Similar to results reported in the literature for the average diversified mutual fund, our results indicate that the average small holding fund does not outperform the S&P 500 index. On average, small holding funds under-perform the market on a risk and investment style adjusted basis by about −20 basis points per month, or by −2.40 per cent per year. We also find that there is a sharp contrast between the performance of Winner and Loser portfolios. On average, Winner portfolios outperform the S&P composite index by 410 basis points per month, or an astounding 49.2 per cent per annum, whereas Losers under-perform by 320, or −38.4 per cent per annum, over the same period. Cross sectional regressions indicate that Winner portfolio abnormal performance is positively and significantly related to fund turnover and the per cent of the fund's assets invested in their top 10 most heavily weighted holdings. Results for Loser portfolios show that abnormal performance deteriorates significantly with turnover, concentration and expenses, but rises with Load and Size.