Thesis Asset Management's Paterson: How to spot skillful active managers

Diversification taken to extremes

Ryan Paterson, research analyst at Thesis Asset Management, has said the widely-held belief that diversification is the key to successful investing has too often been taken to extremes by active managers.

Paterson argued managers who increase the number of holdings in their portfolios beyond 30 stocks in the name of diversification produce a "negligible" benefit from a risk-reduction perspective. "While there is a widely-held belief that diversification is the key to successful investing, the goal of diversification at the micro level is often taken to extremes and, at times, some managers have exchanged traditional risk control (diversification) for returns," he said. "Investors can obtain the greatest risk-reduction benefit by introducing roughly 30 stocks to a portfolio." Active ...