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Not Risky After All?

13 July 2018

Contrary to popular belief, focused portfolios, or those with 50 or fewer securities, have not historically produced more risk than traditional portfolios over 3-,5-, and 10-year periods according to a recent Greenwich Associates study. Additionally, institutional investors believe such portfolios offer greater alpha potential.

Focused Strategies Have Typically Delivered Lower Risk

  • Measures of risk such as beta and down market capture have generally been lower in focused strategies than in highly diversified portfolios across many domestic equity asset classes and over 3-, 5- and 10-year time horizons. Beta measures the volatility of a portfolio in comparison to the broader market. Down market capture measures an investment manager’s overall performance relative to a benchmark in down markets.2
  • Thus focused portfolios have delivered lower risk than diversified strategies over these time periods. According to research, many investors expect that a portfolio of just 50 stocks can realize the primary risk-reduction benefits associated with a diversified portfolio.3
  • Many investors also consider high-conviction focused portfolios a source of outperformance, which is supported by various academic studies (see Focused Portfolios: Swinging at the Right Pitches).

1,2,3 Greenwich Associates. The Power of Focus: Looking for Alpha in a Sea of Beta, 2017.

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