Delegated Portfolios and Scope Characteristics

Abstract

In this paper, we demonstrate that the performance of actively-managed equity portfolios varies cross sectionally with several portfolio scope characteristics. In particular, we show that performance (as measured by Jensen's alpha) increases when a larger fraction of the portfolio is concentrated within the top ten asset holdings and when the portfolio is focused on a small number of sectors as measured by the Herfindahl Index of sector investment concentration. In addition, we find that performance increases with the number of securities held in the portfolio when the number of securities is small but that performance decreases once the number of securities held in the portfolio becomes large. We further demonstrate that these cross sectional results are robust to controlling for other portfolio and fund characteristics such as size, fees, turnover, and investment style. One possible interpretation of our findings is that portfolios that the management team finds more difficult to oversee and manage result in lower performance.