On the concentration of mutual fund portfolio holdings: Evidence from Taiwan

• We test the alternative hypotheses of investment selection skills versus overconfidence of equity mutual funds managers in Taiwan.
• We find that fund holdings’ concentration levels are high and positively related to funds’ risk-adjusted returns in tranquil market periods.
• However, the concentration levels are low and more negatively related to risk-adjusted returns in turmoil market periods.
• Our findings imply that fund managers have superior investment selection skills when the market is less volatile, but they exhibit overconfidence when the market is in turmoil.

This paper tests the alternative hypotheses of investment selection skills versus overconfidence of equity mutual funds managers in Taiwan. We find that fund holdings’ concentration levels are high and positively related to funds’ risk-adjusted returns in tranquil market periods; however, the concentration levels are low and more negatively related to risk-adjusted returns in turmoil market periods. The time varying concentration-performance relation is not driven by fund size. Our finding implies that fund managers have superior investment selection skills when the market is less volatile, but they exhibit overconfidence when the market is in turmoil, suggesting an investment strategy of shifting from concentrated funds to more broadly diversified funds when market condition becomes worse.

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