On the Industry Concentration of Actively Managed Equity Mutual Funds

Mutual fund managers may decide to deviate from a well-diversified portfolio and con-centrate their holdings in industries where they have informational advantages. In this paper, we study the relation between the industry concentration and the perfor-mance of actively managed U.S. mutual funds from 1984 to 1999. Our results indicate that, on average, more concentrated funds perform better after controlling for risk and style differences using various performance measures. This finding suggests that investment ability is more evident among managers who hold portfolios concentrated in a few industries. ACTIVELY MANAGED MUTUAL FUNDS are an important constituent of the financial sector. Despite the well-documented evidence that, on average, actively man-aged funds underperform passive benchmarks, mutual fund managers might still differ substantially in their investment abilities.1 In this paper, we exam-ine whether some fund managers create value by concentrating their portfolios in industries where they have informational advantages