The Not-So-Special Specialists

Research has found significant portfolio overlap between specialists and generalists—as well as comparable risk-adjusted returns.

Concentrated portfolios hold similar securities as generalists and fail to earn superior returns, research has found.

“Specialists are not that special,” wrote Daniel Fricke of Oxford University’s Saïd Business School. “Specialized investors (those with concentrated portfolios) tend to emphasize certain stock-specific characteristics, but we find no evidence that their returns are different from those of diversified investors.”

These investors tended to hold less popular stocks, Fricke continued, and generally displayed higher ownership concentration.

“These stocks tend to be younger, have higher book-to-market values, lower dividend yield, higher firm-specific risk, lower prices, lower market capitalization, and tend to be more actively traded,” he said. 

However, these characteristics were about the only things that made concentrated investors special, the paper said.

Frock observed stock portfolios of nearly 6,000 US institutional investors from 1990 to 2014 and found the majority of investors—concentrated or not—focused on a small subset of securities.

This meant there was a “strong and significant portfolio overlap” among these investors, Fricke said. The average overlap was strongly procyclical, according to the paper, up during market booms and down during busts. 

When compared to generalists, specialists held about the same amount of betas in their portfolios and had similar returns. 

The only difference, the author concluded, was that specialists’ returns were “significantly more volatile,” thanks to stocks with high firm-specific risk. 

Read the full paper, “Are Specialists ‘Special’? The Case of Institutional Investors”.

Related: Where Have All the Polymaths Gone?

By Sage Um