First, it is worth noting that we don’t believe that all stock pickers are able to add value through concentrated investing. We also don’t believe concentration will result in higher returns in all time periods. However, for skilled, high-conviction stock pickers, we believe there is the potential to deliver higher returns over the long run with a concentrated portfolio.
Over the years we’ve interviewed hundreds of stock pickers and have come to understand that most active managers are not equally confident in all the stocks they hold in a broadly diversified portfolio. Consequently, if we believe a particular stock picker can add value via active management, then we believe it is logical that the stock picker can add more value over the long run by concentrating on a smaller number of their highest conviction ideas.