Concentration Manifesto

If the current trend continues, active managers should expect lower fees and more assets lost to passive management. The time for managers to take action is now. Managers are using data-driven analysis to consistently refine their investment process and maximize their edge.

Good active managers perform far better in their larger positions than they do in smaller names. Managers and allocators would both be better served if managers focus on more concentrated portfolios of their best ideas. Data suggest fundamental managers limit their investments to 10-30 positions. In this paper, we discuss four main reasons managers should consider a concentrated portfolio:

1. Empirical Proof: The data show that active managers generate positive alpha when picking 10 stocks but have negative alpha when picking 100+ stocks.
2. Mental Capital: Each manager has a limited supply of mental capital to deploy and must protect it as much as their financial capital.
3. Great Ideas are Hard to Find: Finding more than 30 positive expected return ideas is incredibly difficult.
4. Investors Don’t Need Your Diversification: Allocators do not need an individual fund’s diversification and low volatility because they get it by investing in multiple funds.

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