Do mutual funds with few holdings outperform the market?


This paper investigates the performance of mutual funds that hold a small number of stocks in their portfolio. Similar to results reported in the literature for the average diversified mutual fund, our results indicate that the average small holding fund does not outperform the S&P 500 index. On average, small holding funds under-perform the market on a risk and investment style adjusted basis by about −20 basis points per month, or by −2.40 per cent per year. We also find that there is a sharp contrast between the performance of Winner and Loser portfolios. On average, Winner portfolios outperform the S&P composite index by 410 basis points per month, or an astounding 49.2 per cent per annum, whereas Losers under-perform by 320, or −38.4 per cent per annum, over the same period. Cross sectional regressions indicate that Winner portfolio abnormal performance is positively and significantly related to fund turnover and the per cent of the fund's assets invested in their top 10 most heavily weighted holdings. Results for Loser portfolios show that abnormal performance deteriorates significantly with turnover, concentration and expenses, but rises with Load and Size.

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  1. 1.

    The funds analysed in these studies are characterised as large, broadly diversified funds from various investment styles that exclude sector funds, international funds, index funds, quant funds and bond funds. The benchmarks used to calculate risk-adjusted excess returns are those used in this study and consist of the return on the S&P 500 index, the Fama–French HML and SMB factors and Carhart's Momentum factor, which are all defined below.

  2. 2.

    ‘A fund with few holdings, called a focus fund, has a better chance of beating the S&P 500, but it's more likely that one or two bad stocks can smack shareholders senseless’. Source: Focus funds have big potential, if you dare. USA Today, 11 November 2002. ‘Highly selective funds, with limited shares in the portfolio, have become a popular way for investors to maximise their chances of beating lackluster returns from the stock market’. Source: Focus funds: A way of beating lacklustre stock returns. Financial Times, 29 July 2005.

  3. 3.

    Two quotes attributed to Mr Buffett summarise his investment philosophy: ‘If you are a know-something investor, able to understand business economics and to find five to ten sensibly priced companies that possess important long-term competitive advantage, conventional diversification makes no sense for you’. Source: Hagstrom (1999). Additionally, ‘Wide diversification is only required when investors do not understand what they are doing. Why not invest your assets in the companies you really like…Too much of a good thing can be wonderful’. Source:

  4. 4.

    Focus funds have big potential, if you dare. USA Today, 11 November 2002.

  5. 5.

    The following fund objective statement of the Janus 20 fund taken from the Fidelity website is typical of the fund we are interested in: The fund seeks long-term capital appreciation. The fund is non-diversified and intends to achieve its objective by concentrating its investments in the equity securities of a smaller number of companies than more diversified funds. Typically invests in 15 to 35 firms at a time. The fund may invest in sectors or foreign issuers.

  6. 6.

    The Financial Dictionary and investopedia define focus funds as those that contain a small number of stocks, in general: (a) those who hold a portfolio concentrated in approximately 10–30 stocks, (b) those who concentrate their holdings within 1–3 sectors and (c) those who hold a large number of different stocks, but a large portion of their total portfolio value is concentrated in a very small number of stocks. (; Wall Street Journal defines focus funds as concentrated portfolios that tend to make big bets on just a few dozen stocks versus two to three times that amount for a more diversified offering (Wall Street Journal, 28 November 2006).

  7. 7.

    According to the National Bureau of Economic Research (NBER), the US economy underwent a recession in March 2001 that ended in October of 2001. NBER determined that the trough, which is also known as the beginning of the expansion period, started in November of 2001.

  8. 8.

    Hansen (1999) proposes estimating model parameters and the threshold, γ, using least squares. The overall sample is then divided into regimes based on whether the threshold variable, q i, t (or fund performance in our case) is smaller or larger than the computed threshold γ. The value of γ is computed with the restriction that a minimum percentage of observations must lie in each regime. Hansen provides programs to run his analysis on his website.


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Correspondence to Abhay Kaushik.

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Kaushik, A., Barnhart, S. Do mutual funds with few holdings outperform the market?. J Asset Manag 9, 398–408 (2009).

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  • mutual fund performance
  • expense ratio
  • turnover ratio
  • holdings