Portfolio Concentration And Mutual Fund Performance

Actively managed mutual funds are an important constituent of the financialsector. Despite the heated debate about whether actively managed funds outperformtheir benchmarks, mutual fund managers might still differ substantially in theirinvestment abilities. Mutual fund managers may decide to deviate from awell-diversified portfolio and concentrate their holdings in certain stocks, industriesor regions where they have superior knowledge skills or informational advantages.In this paper, I research the relationship between portfolio concentration andactively managed mutual fund performance in China from2006to2012byconstruction of concentration index on industry, region as well as stock levels. Boththe portfolio approach and panel regression approach show the same findings that anpositive relationship exist between portfolio concentration and mutual fundrisk-adjusted performance. And sub-period evidence also shows that this relationshipis relatively stable during the whole sample period.Considering that positive relationship between fund performance and portfolioconcentration may be driven by fund size effect, I use the portfolio approach and findthat the relationship does not differ significantly among varying fund sizes. Andtaking into account the fact that fund managers tend to include small for privateinformation reasons than larger stocks, I reconstruct the concentration index byexcluding the largest50listed stocks in each sample period, and find that relationshipcan be better explained by small-cap stock holdings. The above findings suggest thatinvestment abilities do exist in managers who hold concentrated portfolios.And lastly, I find that the most concentrated funds tend to be funds which areequity funds, have smaller net assets under management, experienced higher turnover,and not benchmarked to a comprehensive index such as HS300Index, ShanghaiComposite Index and CITIC S&P300.