Why Focus? A Study of Intra-Industry Focus Effects

While the effects of focus have been studied primarily in the context of diversification across industries, a study of focus within one industry can further our understanding of the drivers that underlie focus effects. In particular, we study the effects of focus in the mutual fund industry. We find that funds belonging to more focused fund families outperform similar funds in more diversified families. Moreover, it is the relatedness among funds within a family, rather than the mere narrowness of product offering, which is responsible for the positive focus effect. Total cash inflows into fund families are, however, negatively affected by family focus. Since focus boosts the return of individual funds but reduces the scale of the total fund family, and thereby the fees that fund families received, the interests of fund shareholders and the incentives of the owners of mutual fund families are potentially in conflict.