Changing The Course Of Active Management — The Concentration Manifesto

Is this the end of active portfolio management? You would think so if you listen to pundits. But I see it differently. I believe we have reached a critical juncture that will ultimately redefine the space for the better — where the winners will search for ways to constantly refine their process to maximize their edge.
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At Alpha Theory, we are also searching for ways for our clients to maximize edge. To that end, about a year ago, while doing some research on the impact of “crowdedness” in portfolio sizing, my team and I discovered that crowded names consistently outperformed less crowded names. That made us wonder; in general, do holdings with bigger position sizes outperform those with a smaller position size? After digging through the numbers from a cross section of 60 funds totaling over $70 billion in assets under management, we found empirical evidence that they did.

We knew we were on to something. We then isolated our clients’ highest expected return positions to see if they were the best returns. They were. With all of this demonstrated skill and ability, the question remained: why do active managers underperform? The simple answer: low conviction positions negated most of the performance they generated with the high conviction names.

The Concentration Manifesto is my attempt to get a critical dialogue started between managers and allocators to ultimately improve the active management process. As you will see, the solution is simple, but not easy. It will require that both sides cast aside outdated thinking and embrace the notion that concentration is in their best interest. But by encouraging these important discussions, I believe we will be solidifying the long term survival of the active management industry.

I hope you find the analysis insightful and valuable and I look forward to being part of the conversation.
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