Institutional investors, for the most part, own too many stocks and individuals own too few. So what’s the right number of stocks for a manager to own and legitimately claim to be truly ‘active’?
The authors of this paper put their conclusion right up there in the title when it comes to China. To be specific they’re referring the the A-share market and I thought this was particularly pertinent now that a lot of folk, via the Shanghai-Hong Kong stock connect, will soon have access.
This is a very easy read and the authors Mr. Andrew Stotz and Dr. Wei Lu, both of the University of Science and Technology of China, kindly agreed to allow it to be posted here and you can access it in full via the link below.
Eight Stocks are Enough in China
This conclusion may be new but the lesson, that more than just a handful of stocks rapidly reduces the chance of obtaining meaningful performance, is timeless. There are some excellent charts in the paper that demonstrate,not just for China but Asia as a whole, how a portfolio of more than ten stocks rapidly hampers the process of capturing non-systematic returns.
So, next time you read one of the bigger manager’s literature about attempting to capture superior returns check how many stocks they’re trying this with? If it’s more than thirty you’re almost certainly better off with an ETF.
Happy Sunday