How concerned should investors be about conduct risk in the search for alpha?

Guy Wilkes, financial services regulatory and enforcement partner at global law firm Mayer Brown, explores the notion of conduct risk and if concentrated funds face different challenges from those of more diverse funds.

A recent study published in the Financial Analysts Journal suggests funds with concentrated stock portfolios managed by a single manager perform better than those with multiple managers. In popular imagination, a highly talented fund manager prepared to go out on a limb on a small number of favoured stocks is always likely to outperform a committee of stock pickers managing a large portfolio closely aligned to a benchmark. On the downside, a fund with a concentrated portfolio will also exhibit greater volatility and increased risk of loss. But what about conduct risk? Do concentrated ...