Concentrated Portfolios

Daniel LaRusso: What do you want me to do?
Miyagi: You stay focused.
--Karate Kid 3

Liz Sonders shares data indicating that active money managers are concentrating portfolio holdings more than in the past.

Growth of pas­sive in­vest­ing mo­ti­vating in­creas­ing # of ac­tive man­agers to shun di­ver­si­fi­ca­tion & fo­cus on fewer stocks to dif­fer­en­ti­ate them­selves from low cost, in­dex-track­ing ETFs that have done so well dur­ing 10-year bull mar­ket @WSJ @MorningstarInc pic.twitter.com/5vYX3fqJ9w

— Liz Ann Sonders (@LizAnnSonders) December 4, 2019

Funds holding 35 or less positions have been on the rise for years. Fund holding 20 positions or less have also been rising.

Since Markowitz's (1952) groundbreaking work on portfolio theory, diversification has been a widely accepted way for spreading risk and stabilizing returns. But risk and reward are directly related. Reducing risk also reduces potential returns. Fund managers competing against passively managed funds that spread risk across hundreds of positions have little chance of winning the diversification battle against index funds.

Instead, they are determining that they can compete for investment capital by positioning themselves as superior superior reward producers. The primary way to do this is to manage more focused portfolios. Potential for loss is greater but so is potential for reward.

It so happens that I've been moving toward a similar portfolio design. I like the idea of a 20-30 stock portfolio as a good balance between risk and reward.

Reference

Markowitz, H. (1952). Portfolio selection. Journal of Finance, 7: 77-91.