If concentrating on only their best ideas increases a portfolio manager’s ability to beat a benchmark, why don’t all managers do this?
There are three broad reasons why more managers don’t concentrate their portfolios to a greater degree. First, as we noted, not all managers have approaches that would benefit from concentration. For example, a top-down manager who seeks to identify industries or regions likely to perform well might want to own a larger number of names to ensure good representation in that area. Second, even managers who emphasize bottom-up company research may not feel comfortable with the risks entailed in owning a smaller number of names, so they add more names to reduce overall portfolio risk. Third, asset growth often requires managers to own more names and larger-cap names. As noted earlier, there is a fourth issue—stock pickers who are not skilled may not be able to add value through concentration. In fact, they may detract value by virtue of less diversification. The Masters’ concept addresses each of those issues. We only choose managers we believe are highly skilled and likely to benefit from concentration, we seek to achieve overall portfolio diversification by combining managers, and we limit assets.