Security Concentration and Fund Performance : Do Fund Liquidity and Skills Matter?

This paper examines the role of portfolio concentration at the stock level in generating abnormal returns and tries to reveal the factors behind the relationship between security concentration and fund performance. Our study finds that security-concentrated funds underperform security-diversified funds. Managers of security-concentrated funds have lower stock-picking skills than those of security-diversified funds. Managers of funds with a higher level of security concentration also exhibit poorer market-timing skills than others. The relationship between security concentration and fund performance is more negative and significant for funds with lower fund liquidity and lower market-timing skills. Also, security-diversified funds attract more fund managers with pre-experience than security-concentrated funds. The negative impacts of security concentration on stock-picking skills can be eliminated if fund managers have much past work experience in a particular industry. We do not find any evidence of the effects of education on portfolio choice and fund managers’ skills. This paper contributes to the mutual fund literature by extending the scope and depth of investigation on how concentration investment strategy in actively managed equity funds in an emerging market may perform and what factors are responsible for the performance outcomes. This study offers a better understanding, new knowledge and insights for fund investors, fund managers and regulators to help make the functioning of the fund market more efficient in play a vital role in developing a country's crucial financial system