Mutual fund preference for pure-play firms

We find that actively managed mutual funds have higher ownership in pure-play firms than in conglomerates. The results show that fund managers’ industry expertise explains this preference because investing in pureplays allows the industry expertise to concentrate in one industry and investing in conglomerates dilutes the expertise. The preference is stronger when firms are more affected by industry factors and when fund managers show greater industry expertise. Mutual funds that hold more pure-play firms outperform, show industry and pureplay selectivity, and do not show an effect that scale erodes fund performance. We also discuss how diversification discounts affect our findings