Private Information, Industry Specialization and Performance: A Study of Mutual Funds

Abstract

A significant body of literature initiated by Grossman (1976) and Grossman and Stiglitz (1980) predicts that mutual funds with higher levels of private information are more specialized and deliver superior performance. We analyse the impact of private information on mutual funds' performance for a sample of 224 US sector funds and a control sample of 1135 US equity funds. Using the degree of concentration in economic sectors as a proxy of private information, we find a positive and significant relation between performance and private information for sector funds but not for equity funds. Our results are robust to asset pricing models and benchmark specification.

Keywords: private information, sector funds, performance, industry concentration

JEL Classification: G11, G12, G14