Investment Manager | Value Investor | "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so”
Acadian Asset Management has an interesting study on concentrated portfolios (“𝗖𝗼𝗻𝗰𝗲𝗻𝘁𝗿𝗮𝘁𝗲𝗱 𝗘𝗾𝘂𝗶𝘁𝘆: 𝗣𝗿𝗮𝗰𝘁𝗶𝗰𝗲 𝗩𝗲𝗿𝘀𝘂𝘀 𝗣𝗿𝗲𝗺𝗶𝘀𝗲” https://lnkd.in/eZsdkM9f ) Being a systematic manager which invests in very diversified portfolios, Acadia’s conclusions are not a surprise: “𝘉𝘶𝘵 𝘪𝘯 𝘢𝘯 𝘦𝘮𝘱𝘪𝘳𝘪𝘤𝘢𝘭 𝘢𝘯𝘢𝘭𝘺𝘴𝘪𝘴 𝘰𝘧 𝘢 𝘣𝘳𝘰𝘢𝘥 𝘴𝘦𝘵 𝘰𝘧 𝘤𝘰𝘯𝘤𝘦𝘯𝘵𝘳𝘢𝘵𝘦𝘥 𝘴𝘵𝘳𝘢𝘵𝘦𝘨𝘪𝘦𝘴, 𝘸𝘦 𝘧𝘪𝘯𝘥 𝘯𝘰 𝘦𝘷𝘪𝘥𝘦𝘯𝘤𝘦 𝘵𝘩𝘢𝘵, 𝘪𝘯 𝘱𝘳𝘢𝘤𝘵𝘪𝘤𝘦, 𝘵𝘩𝘦𝘺 𝘰𝘶𝘵𝘱𝘦𝘳𝘧𝘰𝘳𝘮 𝘢𝘴 𝘢 𝘨𝘳𝘰𝘶𝘱.” Concentrated equity strategies have drawn considerable interest from institutional investors in the long-only universe: frustrated with active fees charged for closet indexing, the premise of investing with stock pickers who focus on a limited set of “high conviction” holdings has intuitive appeal. The main result from the study is “𝘵𝘩𝘢𝘵 𝘸𝘩𝘪𝘭𝘦 𝘥𝘪𝘴𝘤𝘳𝘦𝘵𝘪𝘰𝘯𝘢𝘳𝘺 𝘴𝘵𝘰𝘤𝘬 𝘱𝘪𝘤𝘬𝘪𝘯𝘨 𝘢𝘣𝘪𝘭𝘪𝘵𝘺 𝘴𝘶𝘳𝘦𝘭𝘺 𝘦𝘹𝘪𝘴𝘵𝘴 𝘢𝘮𝘰𝘯𝘨 𝘪𝘯𝘴𝘵𝘪𝘵𝘶𝘵𝘪𝘰𝘯𝘢𝘭 𝘮𝘢𝘯𝘢𝘨𝘦𝘳𝘴, 𝘤𝘰𝘯𝘤𝘦𝘯𝘵𝘳𝘢𝘵𝘪𝘰𝘯 𝘪𝘴 𝘯𝘰𝘵 𝘢𝘯𝘺 𝘦𝘢𝘴𝘺 𝘴𝘰𝘭𝘶𝘵𝘪𝘰𝘯 𝘧𝘰𝘳 𝘪𝘯𝘷𝘦𝘴𝘵𝘰𝘳𝘴 𝘭𝘰𝘰𝘬𝘪𝘯𝘨 𝘵𝘰 𝘣𝘰𝘰𝘴𝘵 𝘢𝘤𝘵𝘪𝘷𝘦 𝘱𝘦𝘳𝘧𝘰𝘳𝘮𝘢𝘯𝘤𝘦”. Strategies with the most concentrated portfolios represent a disproportionate fraction of the best performers, but also of the worst performers: these strategies are either very good or very bad, no middle ground. “𝘛𝘩𝘪𝘴 𝘪𝘴 𝘪𝘯𝘵𝘶𝘪𝘵𝘪𝘷𝘦: 𝘤𝘰𝘯𝘤𝘦𝘯𝘵𝘳𝘢𝘵𝘦𝘥 𝘴𝘵𝘳𝘢𝘵𝘦𝘨𝘪𝘦𝘴 𝘥𝘦𝘭𝘪𝘣𝘦𝘳𝘢𝘵𝘦𝘭𝘺 𝘧𝘰𝘳𝘨𝘰 𝘥𝘪𝘷𝘦𝘳𝘴𝘪𝘧𝘪𝘤𝘢𝘵𝘪𝘰𝘯, 𝘢𝘯𝘥, 𝘵𝘩𝘦𝘳𝘦𝘧𝘰𝘳𝘦, 𝘥𝘪𝘴𝘱𝘭𝘢𝘺 𝘩𝘪𝘨𝘩𝘦𝘳 𝘭𝘦𝘷𝘦𝘭𝘴 𝘰𝘧 𝘢𝘤𝘵𝘪𝘷𝘦 𝘳𝘪𝘴𝘬.” This is also common sense: no one ever said stock picking is easy and for everyone. However, I believe the reason for the aggregate underperformance is due not to concentration per se, but rather to execution (as discussed in this book review https://lnkd.in/eWuZ2X_u ): 𝘁𝗵𝗲 𝗿𝗲𝗮𝗹 𝘀𝗸𝗶𝗹𝗹 𝗶𝗻 𝘀𝘁𝗼𝗰𝗸 𝗽𝗶𝗰𝗸𝗶𝗻𝗴 𝗶𝘀 𝗻𝗼𝘁 𝗶𝗻 𝘀𝗲𝗹𝗲𝗰𝘁𝗶𝗻𝗴 𝘁𝗵𝗲 𝗯𝗲𝘀𝘁 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁𝘀, 𝗯𝘂𝘁 𝗶𝗻 𝘄𝗵𝗮𝘁 𝘆𝗼𝘂 𝗱𝗼 𝗮𝗳𝘁𝗲𝗿, 𝘄𝗵𝗲𝗻 𝘀𝘁𝗼𝗰𝗸𝘀 𝗲𝗶𝘁𝗵𝗲𝗿 𝗴𝗼 𝘂𝗽 𝗼𝗿 𝗱𝗼𝘄𝗻.
