Well, it merits more investigation. Like I said, there have been at least a few studies of high-conviction holdings, and maybe this is a particularly weak one. Maybe the others were better constructed. It’s not like these flaws, if noticed, would be impossible to correct. It’s just that they weren’t noticed.
As for hedge funds, I think that’s an entirely different ball game. This study, like the other studies I’ve read about, focused only on actively managed mutual funds.
I’m planning to look into this a bit further shortly. I’ll let you know what I find out.
On an earlier point about size of assets, here is a quote I came across from Warren Buffet:
“If I was running $1 million today, or $10 million for that matter, I’d be fully invested. Anyone who says that size does not hurt investment performance is selling. The highest rates of return I’ve ever achieved were in the 1950s. I killed the Dow. You ought to see the numbers. But I was investing peanuts then. It’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that. The universe I can’t play in [i.e., small companies] has become more attractive than the universe I can play in [that of large companies]. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in.”
Yes Jeff, i do think trying to attenuate volatility reduces their long term returns. Remember Buffet talking about a Lumpy high return vs a smooth low return. My friend who is in the institutional space tells me that, anytime there is sustained under-performance (2 to 3 years), lots of assets leave.