The fast view
- Concentrated equity portfolios have gained popularity in recent years as investors have associated these with higher levels of active management, and/or in order to target specific style exposures or themes.
- Our research concludes that concentrated portfolios are not the only game in town when it comes to taking sufficient levels of active risk, in an appropriately diversified manner, to generate attractive returns.
- Furthermore, we have observed that concentrated portfolios, while aiming to provide exposure to a balance of style characteristics, can be at risk of exhibiting style biases without appropriate portfolio construction considerations. This leaves them susceptible to market rotations and reduces the degree to which security selection drives active risk, introducing unintended risks for clients that associate these portfolios with ‘core’ exposures.
- We believe there is a clear role in portfolios for approaches that invest in a diversified number of holdings which express a balance of investment styles over the course of a market cycle, while maintaining material active exposures primarily driven by idiosyncratic, stock-specific risk.
General risks. All All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.
Specific risks: Geographic/Sector: Investments may be primarily concentrated in specific countries, geographical regions and/or industry sectors. This may mean that, in certain market conditions, the value of the portfolio may decrease whilst more broadly-invested portfolios might grow. Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Derivatives: The use of derivatives is not intended to increase the overall level of risk. However, the use of derivatives may still lead to large changes in value and includes the potential for large financial loss. A counterparty to a derivative transaction may fail to meet its obligations which may also lead to a financial loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems.
