Economic Relevance of Concentration for Emerging Markets Funds Performance

Abstract

The aim of this article is to explore the relationship between portfolio concentration and the performance of mutual funds investing in emerging and developed markets. Following the research line of Fama and French [2012], which reveals the explanatory power of models on local returns, we confi rm that the picking process based only on the level of tracking error may contribute to disappointing results when not accompanied by information about the fund concentration in multiple market factors. The emphasis on the performance of local focused funds reveals a competitive advantage of the emerging markets sample. Moreover, our work shows a new perspective by providing suggestive evidence that the association between breadth of the strategies and alpha is reinforced in the post-crisis period. To our knowledge, our investigation is the fi rst comprehensive study on the topic that focuses on funds with a country specialization and on the robustness of the results in different time periods.

TOPICS: Mutual funds/passive investing/indexing, developed, emerging, performance measurement