The perception that concentrated investment managers are riskier or more volatile than a diversified index is slowly changing. Despite academic research that dates back several decades, concentrated managers continue to encounter the instinctive belief from some investors that holding only a few securities in a portfolio will lead to more volatile performance outcomes. While more volatile performance returns certainly could be the case for any given concentrated portfolio, it is far less certain that it should be the case.
It is just as likely, if not more likely, that concentrated portfolios could deliver superior risk-adjusted returns compared to a diversified index. And this is without taking into account the types of holdings for a particular investment manager. For equity investment managers, emphasizing factors such as quality could help further reduce risk profiles without necessarily reducing performance potential. In fact, the combination of concentration and quality in equity portfolios might be one of the more optimal investment frameworks available to investors today.