Dan Chung: Focused Strategies — Debunking the Risk Myth
May 3, ​2018
With growing demand for alpha driving increased use of focused investment strategies, it is important to explore the potential downside, if any, of these products​.

​In our recent study “The Power of Focus,” our partner, Greenwich Associates, examined not only the appetite for focused strategies among institutional investors, intermediaries and investment consultants, but also the outlook for these strategies and their associated risks. While a small portion of investors believe the increased alpha potential of concentrated portfolios comes with inherent risk and volatility, our study found that focused portfolios consisting of approximately 50 or fewer securities typically exhibited lower risk as measured by beta and down market capture over three-, five-, and ten-year periods than strategies with a larger number of stocks. 

​The majority of investors do believe risk can be managed with focused portfolios. Indeed, 84% of institutional investors and 95% of intermediaries surveyed believe that using portfolios containing 50 stocks can achieve the majority of the risk-reduction benefits of a more diversified portfolio. According to one study participant, risk can potentially be reduced by combining multiple focused strategies to build “a better, more risk-controlled product than a diversified strategy that has even more holdings.” 

Additionally, many decision makers believe that attempting to mitigate risk by increasing the number of a portfolio’s holdings defeats the purpose of focused strategies. Instead, investors can better manage risk without sacrificing alpha potential by diligently taking into account correlations among assets when building portfolios.
Of course, the risk associated with a focused strategy compared to other peer group strategies is driven largely by a portfolio manager’s skill and process. We expect to see continued demand for focused strategies run by skilled managers who can prove that their stock selection is likely to lead to outperformance. 
To learn more about the popularity and benefits of focused strategies among investors, download our full whitepaper on The Power of Focus​.

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