Investors continue to experience the pitfalls of over-diversification, due to the long-term poor performance of international managers holding a large number of companies in their portfolios.
"You look at the portfolios of mainstream fund managers and they've got hundreds of stocks," Private Portfolio Managers (PPM) chairman Hugh MacNally told InvestorDaily.
"The notion of diversifying investments across a large number of companies [results] in the problem that you end up with a whole lot of stocks that are less than ideal."
According to Morningstar data, one out of 109 international managed funds produced a positive return for the five years ending 31 July 2012.
"The main trap we see is that in diversifying to a very high degree, what you do is limit the amount of stocks you find very attractive and you put in a large number of themes that are less attractive," MacNally said.
"We think this creates problems of oversight. It's very hard for the portfolio manager to be across 100, 200 or 300 stocks [as] the amount of information is not viable."
Increasing the number of companies a fund was invested in did not deliver any particular advantage to investors, he said.
"It's far more appropriate that we spend a lot more time on trying to identify and be very discerning in the stocks that we actually invest in," he said, adding it was a better way of managing risk than broad-based diversification.
From an investor's perspective, the misconceptions around diversification stemmed from a fear of portfolios being under-diversified and thus the more diversification, the better, he said.
"The benefits of diversification have been overestimated and we believe diluting the quality of a portfolio by adding lesser-quality holdings can be damaging," he said.
"We believe the problems associated with diluting the quality of a portfolio with lesser-quality holdings can be just as damaging as under-diversification."
The approach taken by PPM was thematic and limited its holdings to about 20 companies.
The boutique investment manager has opened up its 'by request only' concentrated international strategy to new investments from high net worth individuals and family offices.
The strategy's total returns after fees have exceeded 41 per cent over the past five years.
