Beverly Chandler, Opalesque London: Robin Penfold and Craig Baker of Towers Watson have arrived at the conclusion that diversification is not necessarily key in equity investors’ portfolios. The pair presents their findings in their paper, Concentrated equity products, why we generally prefer them to diversified products for a typical investor’s portfolio, reporting that adding skilled active
management increases expected return without much
change in total risk. "We therefore encourage equity
investors to seek products with higher expected returns.
That means concentrated rather than diversified products" they conclude.
The choice between focussed or diversified investment stems from the investor, the authors write. "Most investors want to improve the return
efficiency of their entire portfolio. We call this a
'portfolio-level preference’. That requires them
to consider the contribution of asset allocation
and active managers. We generally find that
using skilled active managers helps to improve
overall investment efficiency. That is because
expected active returns add to expected asset
returns, whilst overall risk barely changes with the
introduction of active risk. We therefore expect
active management to have positive marginal
impact on overall risk-adjusted return."
Penfold and Baker believe that if all other things are equal, investors