Portfolio Concentration and Performance of Institutional Investors Worldwide

Using data on security holdings of 10,771 institutional investors from 72 different countries, we test whether concentrated investment strategies result in excess risk-adjusted returns to institutional investors. We examine three measures of portfolio concentration: home country, foreign country, and industry concentration, and we find that the degree of portfolio concentration is associated with higher risk-adjusted returns of institutional investors worldwide. Results suggest that, in contrast to the traditional asset pricing theory, concentrated investment strategies in international markets can be underdiversified but optimal. Consistent with the information advantage theory, investors rationally choose to overweight certain markets and industries.