Security Concentration and Fund Performance*

Abstract

This paper examines whether focused funds offer superior performance in Korean actively managed equity funds which are not subject to survivorship bias over November 2001 to December 2008. On the one hand, due to information advantages, fund manager may decide to allocate their fund to specific industry and security focally, which means concentrating their holdings in few industry and focusing on a small number of securities to produce superior performance. On the other hand, due to a convex option-like payoff, liquidity, idiosyncratic risk and trading behavior, focused funds could not outperform diversified funds. Our paper finds no evidence that focused funds outperform diversified funds significantly. Even after controlling for various fund characteristics, and using several alternative concentrate measures and also performance measures, fund performance is positively related to the degree of diversification. In further securitizing primary sources in details, we identify the several evidences as underperformance causation of focused funds that the linkage of focused fund underperformance to liquidity problem, idiosyncratic risk, and trade performance could be possibilities. Hence our results do not support the view that manager with focused funds have superior stock selection ability and in turns focused funds provide more value to fund investors. Our findings have an important investor strategy meaning in that it provides valuable ways of money management to money managers in fund industry.