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Do fund managers end up diversifying by having 50-60 stocks in their portfolio? Also over a period of 15 years, which is likely to perform better - a focused fund or a diversified one with 50-60 stocks?
- Dhruv Gupta
I would say that it's a matter of choice. I don't think that having 50-60 stocks in a portfolio is a bad idea. Similarly, I don't think that even a focused portfolio is a bad idea. So, it is all about how much volatility you are comfortable with. A focused strategy can backfire if the fund manager is only investing in say 15-20 stocks and five of the 20 do not work well, then you are in trouble. In the case of a much broader portfolio, say 55 stocks, these also have their own constraints.
Further, there is something called as a winner's curse. A fund does well, many investors start investing in it. Consequently, the asset base of the fund increases. Now, investing a lot of money requires a lot of stocks. One can not do so with only 25-30 stocks. To summarise, my answer is a bit tilted towards a focused strategy. However, when a focused strategy doesn't work, things can turn bad big time.
This article was originally published on February 11, 2020.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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