Portfolio Concentration and Investment Manager Performance

Abstract

Abstract:This study examines the relationship between investment performance and concentration in active equity portfolios. Active management is dependent on the success of two important components in the investment process -stock selection skill and portfolio management. Our study documents a positive relationship between fund performance and portfolio concentration. The relationship is stronger for stocks in which active managers hold overweight positions, as well as for stocks outside the largest 50 stocks listed on the Australian Stock Exchange (ASX). We find more concentrated funds tend to be those implementing growth styles, having smaller aggregate assets under management, being institutions which are not affiliated with a bank or life-office entity, whose funds experience past period outflows, and who are benchmarked to narrower indexes than the S&P/ASX 300. JEL classification: G23Keywords: Portfolio concentration, investment performance, tracking error, active funds _____________________________________________________________________ Abstract:This study examines the relationship between investment performance and concentration in active equity portfolios. Active management is dependent on the success of two important components in the investment process -stock selection skill and portfolio management. Our study documents a positive relationship between fund performance and portfolio concentration. The relationship is stronger for stocks in which active managers hold overweight positions, as well as for stocks outside the largest 50 stocks listed on the Australian Stock Exchange (ASX). We find more concentrated funds tend to be those implementing growth styles, having smaller aggregate assets under management, being institutions which are not affiliated with a bank or life-office entity, whose funds experience past period outflows, and who are benchmarked to narrower indexes than the S&P/ASX 300. JEL classification: G23

When fund management skill is more valuable?

“…In addition, 1997 (DGTW), who employ characteristics-based benchmarks, find that the average active US equity fund can beat its benchmarks, gross of fees and trading costs. Further, DGTW find that some active equity fund managers outperform their benchmarks, precosts, by a wide margin; other, more recent papers, provide further insights into the characteristics of skilled funds (Brands, Brown, & Gallagher, 2005;Cremers & Petajisto, 2009;Cremers et al, 2016;Dong & Doukas, 2019;Kacperczyk et al, 2005).…”

Performance of Foreign and Global Mutual Funds: The Role of Security Selection, Region‐Shifting, and Style‐Shifting Abilities

“…While there are considerable studies on the performance of domestic mutual funds (e.g., Grinblatt and Titman, 1992;Carhart, 1997;Daniel, Grinblatt, Titman and Wermers, 1997;Wermers, 2000;Brands, Brown and Gallagher, 2005;Kacperczyk and Seru, 2007;Cremers and Petajisto, 2009;Amihud and Goyenko, 2013), research on the performance of foreign and global funds is not as extensive (Cumby and Glen, 1990;Gallo and Swanson, 1996;Glassman and Riddick, 2006;Jiang, Yao and Yu, 2007;Turtle and Zhang, 2012). Furthermore, current evidence about the performance of foreign and global equity funds is mixed.…”

Un-diversifying during crises: Is it a good idea?

“…On the other hand, in periods of financial distress and extreme losses, diversification strategies might not be robust to high levels of volatility and correlation among financial assets, leading to underperforming investment strategies. For this reason, in practice, many portfolio managers rather invest in concentrated portfolios, claiming that focusing on few securities yields better risk-returns performance, with lower trading and monitoring costs (Kacperczyk et al, 2005;Brands et al, 2005;Ivkovic et al, 2008).…”