The degree to which a mutual fund's assets can be concentrated in a relative handful of securities depends on whether the fund is legally classified as diversified or non-diversified.
Diversified funds--which comprise more than 90% of all funds available today--are required to have three-quarters of their assets divvied up so that no single security amounts to more than 5% of the fund.
Technically, a manager of a diversified fund could invest the other quarter of the fund in a single security. But, in fact, few diversified funds ever exceed the 5%-of-assets line for individual securities.
Diversified funds, then, can hold hundreds or even thousands of stocks. Which, not surprisingly, causes many of them to perform in line with the broad market, as measured by the Standard & Poor's 500-stock index, for example. Naturally, a fund that looks like an index fund is a lot less likely to beat the performance of that index.
A non-diversified fund, by comparison, generally can have as much as half its portfolio in a single security. Nor is it subject to the 5% limit on smaller holdings. That means the manager can focus on relatively few investments--and if just a couple of them are big hits, the fund can easily beat the broad market's performance.
The downside, of course, is that having fewer stocks raises the fund's risk level. Today's top-performing fund could very well be tomorrow's dog if just a few of those concentrated investments go sour.
Not sure how diversified, or non-diversified, your fund may be? Look at the prospectus--it discloses the fund's legal status, and the specific parameters the manager follows in building the portfolio.