Market conditions and the effect of diversification on mutual fund performance: Should funds be more concentrative under crisis?

Jin-Li Hu*, Tzu Pu Chang, Ray Yeutien Chou

*Corresponding author for this work

Research output: Contribution to journalArticle

5 Scopus citations

Abstract

This paper investigates the non-monotonic and non-linear effect of diversification on mutual fund performance. We apply a frontier-based efficiency measure, the stochastic frontier approach, to estimate fund efficiency and the benefit of diversification. The empirical results indicate that concentration strategy may not be appropriate for fund managers, and the benefit of diversification disappears or negatively affects performance when a fund holds too large a number of different stocks. Moreover, this paper examines whether market conditions moderate the relation between diversification and fund performance. The result shows that the benefit of diversification increases within low market return, high market volatility, and financial crisis, implying that the number of stocks needed to achieve a well-diversified portfolio increases under such market conditions.

Original languageEnglish
Pages (from-to)141-151
Number of pages11
JournalJournal of Productivity Analysis
Volume41
Issue number1
DOIs
StatePublished - 1 Jan 2014

Keywords

  • Crisis
  • Diversification
  • Market conditions
  • Mutual funds
  • Non-monotonic effect
  • Stochastic frontier

Fingerprint Dive into the research topics of 'Market conditions and the effect of diversification on mutual fund performance: Should funds be more concentrative under crisis?'. Together they form a unique fingerprint.

  • Cite this