Concentrated portfolios outperform diversified rivals
Fund managers who invest in concentrated portfolios are able to outperform those who invest in diversified portfolios by 400 basis points, according to research coming out of the United Kingdom.
Investment skills consultancy firm Inalytics examined nearly 600 equity portfolios in its database and found that portfolios with the lowest quartile of holdings performed over 400 basis points better than the highest quartile of holdings.
Inalytics chief executive Rick Di Mascio said there were a number of explanations for the research findings including manager skill set, survival bias and greater attention being given to smaller equity sets.
“One possible rationale is that only the most skilful managers are given the punchier portfolios to run. A good analogy is that only the very best racing drivers get to drive Formula 1 cars.
“Another explanation is that the database may be biased towards successful managers who were given the opportunity and 'survived’. Once again there is a parallel with the Formula 1 drivers, but at least in the case of fund managers it isn’t dangerous,” Di Mascio said.
“Third, from a behavioural finance perspective, the literature suggests that the lower the number of holdings in the portfolio, the more attention each one receives.
“Whatever the explanation, the data is clear - the more concentrated the portfolio, the more likely the performance is going to be good,” he says.
Recommended for you
Sydney-based alternative fund manager East Coast Capital Management has formed its first advisory council as it enters its next phase of growth.
With 40 per cent of advice practices looking to increase their ETF usage, the next frontier being embraced is smart beta ETFs with flows doubling in July, providers have said.
Australian ETFs saw flows of $5.8 billion in July, more than double the previous month, and adviser adoption is tipped to help total flows reach $50 billion by the end of the year.
Pinnacle’s London affiliate, Life Cycle Investment Partners, has secured over $15 billion in FUM in its first year and achieved profitability, the firm’s fastest affiliate to do so.
