The main article from the Q2 2007 Investment Quarterly (on optimal size for actively managed funds) was adapted from this much longer and more comprehensive paper by Patrick Collins. It addresses many other issues relating to investment prudence for fund managers.

Without More

Does Size Matter?

The only reason to invest in actively managed funds is to earn alpha: returns greater than those of the market. As active funds accumulate a history of such returns, they naturally attract more and more money. But for various reasons, it turns out that as an active fund grows, it becomes harder and harder to earn alpha. In this quarter’s main article, we explore why that is so, and whether there is such a thing as optimal size for actively managed funds.

The article is adapted from a much longer paper addressing many issues of investment prudence for fiduciaries, written by our own Patrick Collins, and available here.

Our main article this quarter reviews the venerable subject of portfolio diversification. Why is it important to diversify? You’ll know exactly why, by the time you finish reading.

Investment Quarterly Download

In this edition of Investment Quarterly, we discuss systems for picking top-performing stocks, with particular focus on the Schwab Equity Ratings, a relatively new system that has recently performed well relative to its benchmark. We illustrate why the selection of an appropriate benchmark is essential for evaluating any stock picking system, and how market conditions can skew our perceptions. Finally, we pose an intriguing question—if a stock picking system worked, would you use it? The answer may surprise you.

Download PDF