• Title: PORTFOLIO CONCENTRATION AND PERFORMANCE OF INSTITUTIONAL INVESTORS WORLDWIDE
  • Authors: NICOLE CHOI, MARK FEDEINA, HILLA SKIBA, TATYANA SOKOLYK
  • Publication: JOURNAL OF FINANCIAL ECONOMICS,  2017 (version here)

What are the research questions?

Get The Full Henry Singleton Series in PDF

Get the entire 4-part series on Henry Singleton in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

We respect your email privacy

Portfolios in international markets tend to be more concentrated (due to home bias). There is an unresolved puzzle in the literature: Does this concentration come from 1) behavioral bias or from 2) a rational portfolio optimization implied by the information advantage theory? The authors ask whether there supporting evidence for the information advantage theory (e.g., Van Nieuwerburgh and Veldkamp, 2009). Specifically,

  1. Is portfolio concentration linked to higher risk-adjusted returns?
  2. Do skilled investors build more concentrated portfolios?
  3. Is the degree of home bias related to the level of home market uncertainty

What are the Academic Insights?

By studying a data set with security holdings of 10,771 institutional investor portfolios (mutual funds, hedge funds, investment advisors)  domiciled in 72 countries, the authors find:

  1. YES- Portfolio concentration in foreign and home markets, as well as portfolio industry concentration, are positively related to risk-adjusted returns. The authors study five different measures of concentration and perform risk adjustment tests to ensure that the relation is not driven by higher risk characteristics
  2. YES- Institutional investors with higher learning capacity ( i.e more skilled investors) build more concentrated portfolios in foreign markets and industries
  3. YES-The degree of home bias is positively related to the level of home market uncertainty

Why does it matter?

Traditional asset pricing theory states that optimal portfolios should be diversified in international markets and securities. But this paper shows that concentrated investment strategies in home markets can be optimal.It appears that, if investors use an information advantage in building the portfolio, the “diversification is king” rule may not be applicable. By deviating from the well-diversified world market portfolio, investors can enhance risk-adjusted returns!

The Most Important Chart From the Paper:

concentration

Elisabetta Basilico, Ph.D., CFA, (@ebasilico) is an independent investment consultant. With co-author Tommi Johnsen, PhD, she is writing an upcoming book on research backed  investing. You can learn more at http://academicinsightsoninvesting.com/


Note: This site provides no information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.


Join thousands of other readers and subscribe to our blog.


Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.


Definitions of common statistics used in our analysis are available here (towards the bottom)

Article by Elisabetta Basilico, PhD, CFA - Alpha Architect