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Portfolio concentration and mutual fund performance

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  • Fulkerson, Jon A.
  • Riley, Timothy B.

Abstract

Mutual fund managers should choose to increase their portfolio concentration when their information set is valuable enough that the benefits of the expected increase in alpha more than offsets the costs of the expected increase in idiosyncratic volatility. Consistent with that idea, we find that fund performance improves after concentration increases. Because the expected costs of increased concentration vary between funds and over time, the required expected benefits before managers choose to increase concentration should also vary. Among other results, we show that the concentration-performance relation is stronger for funds with less institutional ownership and when investor sentiment is low.

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  • Fulkerson, Jon A. & Riley, Timothy B., 2019. "Portfolio concentration and mutual fund performance," Journal of Empirical Finance, Elsevier, vol. 51(C), pages 1-16.
    • Handle: RePEc:eee:empfin:v:51:y:2019:i:c:p:1-16
    DOI: 10.1016/j.jempfin.2019.01.006
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    More about this item

    Keywords

    Mutual fund; Alpha; Concentration; Information; Idiosyncratic volatility; Skill;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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