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The implications of blending specialist active equity fund management

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  • David R Gallagher
  • Peter Gardner

Abstract

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.

Suggested Citation

  • David R Gallagher & Peter Gardner, 2006. "The implications of blending specialist active equity fund management," Journal of Asset Management, Palgrave Macmillan, vol. 7(1), pages 31-48, May.
    • Handle: RePEc:pal:assmgt:v:7:y:2006:i:1:d:10.1057_palgrave.jam.2240200
    DOI: 10.1057/palgrave.jam.2240200
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    Cited by:

    1. Andrew B. Ainsworth & Kingsley Fong & David R. Gallagher, 2008. "Style Drift and Portfolio Management for Active Australian Equity Funds," Australian Journal of Management, Australian School of Business, vol. 32(3), pages 387-418, March.
    2. Michael Stein & Svetlozar T Rachev, 2011. "Style-neutral funds of funds: Diversification or deadweight?," Journal of Asset Management, Palgrave Macmillan, vol. 11(6), pages 417-434, February.

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