The implications of blending specialist active equity fund management

Employing a database of equity portfolio holdings for active US equity fund managers, this research provides a simulation analysis of the various portfolio blends as additional active equity funds are added to a single portfolio structure (ie a manager-of-managers arrangement). This analysis is particularly important given the significance of manager selection and portfolio configuration to pension funds. A significant erosion in the active bets of stocks held in blended portfolios is documented. The research also identifies a potentially significant efficiency problem for blended portfolios, where up to 15 per cent of stock trading in any quarter is executed between common equity fund managers for a ten-fund portfolio case. As expected, this effect is amplified when an analysis is performed at the industry level. Improved efficiencies in active portfolio design would most likely be achieved where a centralised decision maker is permitted to construct and maintain the portfolio structure in a manner which does not erode the active investment opportunities offered by selected institutions.