Bigger doesn't always mean better
Monday, 31 August 2009 12:25pm
Having a large portfolio with hundreds of companies doesn't always generate the best diversification as the GFC has proven - sparking a time to revisit concentrated portfolio strategies to reap better returns, said Aberdeen Asset Management.
For Andrew McMenigall, senior investment manager at Aberdeen Asset Management, having an international shares portfolio with hundreds of stocks can often spell investment traps - increasing lack of conviction and heightening company knowledge risk.
Speaking at a luncheon on Friday, McMenigall pointed out that having a stock-picking, high conviction strategy and a concentrated portfolio of around 40 to 60 stocks allows fund managers to revisit the companies often, while keeping a closer eye on their performance.
"If you have a concentrated portfolio, what does it do? It concentrates your money - know your companies well.
"The best thing [we can do] on behalf our clients is investing in a small number of good quality companies and investing in them with a [high conviction] view," he said.
Having around 50 stocks for instance is "sophisticated" enough for diversification, but allows fund managers such as Abereen to monitor closely each company and how they can contribute from top to bottom of the fund, he said.
Quality research remains a key ingredient in achieving good returns in a concentrated portfolio.
McMenigall said for instance Aberdeen currently employs six "regional teams" to work on its international equities fund, which are US, UK, Europe, Asia, Japan and Germany.
"Each of these regional teams are putting in place an unconstrained concentrated portfolio from the bottom up, so their best ideas are [captured] within their regions," he said.
Over a five year period, Aberdeen has outperformed the benchmark with 5.76 per cent in net returns to July 31, versus the index's 0.27 per cent returns.
Ruth Liew
