The Implications of Blending Specialist Active Equity Management

Abstract:     
Employing a database of equity portfolio holdings for active U.S. fund managers, we provide a simulation analysis of the various portfolio blends that might arise as additional active equity funds are added to a single portfolio structure. We document increased difficulties for blended portfolios in their attempts to outperform the market. This arises due to significant erosion in the active bets of stocks held in blended portfolios. Our research also identifies a potentially significant efficiency problem for blended portfolios, where up to 15 percent of stock trading in any quarter is executed between common equity fund managers for a 10 fund portfolio case. As expected, this effect is amplified when an analysis is performed at the industry level. Improved efficiencies in active portfolio design would be most likely achieved where a single agent is permitted to construct and maintain the portfolio structure in a manner which does not erode the active investment opportunities offered by selected institutions.

Keywords: Portfolio Design, Manager Configuration, Decentralised Portfolio Management

JEL Classifications: G23

Working Paper Series