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

The Effect of Management Design on the Portfolio Concentration and Performance of Mutual Funds

“…As already mentioned, several previous studies are closely related to our study (e.g., Brands et al 2005;Ivković et al 2008;Cohen et al 2010;Huij and Derwall 2011). Brands et al (2005) defined portfolio concentration as the extent to which the portfolio deviates from the market portfolio (i.e., the Australian Stock Exchange S&P/ASX 300) and found a positive relationship between the performance of actively managed portfolios and portfolio concentration.…”

“…A recent strand of research has examined fund or manager characteristics that affect mutual fund performance in order to identify which mutual funds perform better. 1 Our study builds on the literature that has identified portfolio concentration as a key dimension that affects performance (e.g., Brands, Brown, and Gallagher 2005;Kacperczyk, Sialm, and Zheng 2005;Ivković, Sialm, and Weisbenner 2008;Cohen, Polk, and Silli 2010;Huij and Derwall 2011) and extends it in several directions. First, many of these studies measured the concentration of portfolios on the basis of concentration across industry sectors, but we found an additional, marginal impact on performance by within-sector concentration.…”

“…Brands et al (2005) defined portfolio concentration as the extent to which the portfolio deviates from the market portfolio (i.e., the Australian Stock Exchange S&P/ASX 300) and found a positive relationship between the performance of actively managed portfolios and portfolio concentration. Ivković et al (2008) looked at individual investors' portfolio concentration and found that investors with focused portfolios are better informed than those with diversified portfolios.…”

Undiversifying 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).…”

Predictive power of Brazilian equity fund performance using R2 as a measure of selectivity

“…Among these, worth mentioning are those from Brands, Brown, and Gallagher (2005), Cremers, Ferreira, Matos, and Starks (2011), Cremers and Petajisto (2009), and Kacperczyk, Sialm, and Zheng (2005. Th ese studies show that, in general, the greater the divergence between these funds' positions and the composition of market indices, the greater the performance presented.…”