Global equity fund performance, portfolio concentration, and the fundamental law of active management

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Abstract

This paper investigates the relation between portfolio concentration and the performance of global equity funds. Concentrated funds with higher levels of tracking error display better performance than their more broadly diversified counterparts. We show that the observed relation between portfolio concentration and performance is mostly driven by the breadth of the underlying fund strategies; not just by fund managers' willingness to take big bets. Our results indicate that when investors strive to select the best-performing funds, they should not only consider fund managers' tracking-error levels. More important is that they take into account the extent to which fund managers carefully allocate their risk budget across multiple investment strategies and have concentrated holdings in multiple market segments simultaneously.

Original languageEnglish
Pages (from-to)155-165
Number of pages11
JournalJournal of Banking & Finance
Volume35
Issue number1
DOIs
Publication statusPublished - Jan 2011

Keywords

  • Mutual funds
  • Performance
  • Portfolio concentration
  • Breadth
  • COMMON RISK-FACTORS
  • MUTUAL FUNDS
  • INTERNATIONAL DIVERSIFICATION
  • INDUSTRIAL-STRUCTURE
  • MOMENTUM STRATEGIES
  • RETURNS
  • MARKETS
  • INVESTMENT
  • STOCKS

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