A couple of Yale professors recently published an interesting study in which they claim to have proven that if you are going to choose active funds vs. index funds for a portion of your portfolio, the actively-managed funds that are the most concentrated will in general perform better over time than those that are more diverse.
These guys claim that with more concentrated funds, the stock-picking “ability” of the managers has a chance to make an impact and, in the aggregate, the most concentrated funds have actually outperformed indices by ~ 1% more than the cost spread (1980-2003).
This conclusion runs counter to my judgement. Although I appreciate their argument, I wonder about consistency and volatility: i.e . over what period of time do these concentrated funds outperform (not as a group - but specific funds) - and what volatility of returns do you need to endure in order to earn this return premium. It is all very well if the universe of concentrated funds outperforms - but as an investor I have to make a limited number of fund picks - which is why the consistency & volatility questions are so critically important.
I would be fascinated to hear what others have to say about this.
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