08 May 2024

At the Money: Building A Concentrated Portfolio

1Frameworks

6Insights

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Factor-Aware Concentrated Portfolio Construction

Select a few strong stocks while diversifying their true risk drivers

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Insights & moments

The myth-busts, hot takes, explainers, and tools worth keeping.

Myth Buster· 1

Myth Buster10:25

Active Management Does Not Require Rejecting Passive Funds

Slimmon rejects the idea that investors must choose exclusively between active and passive strategies. He personally combines passive market exposure with proven active managers, treating the two approaches as complementary rather than ideological rivals.

Passive strategies provide inexpensive market exposure.
High-conviction active management can serve a separate role.
Slimmon holds both passive strategies and active managers personally.
The meaningful distinction is genuine active management versus closet indexing.

“Look, Barry, I've got no problem with people getting market exposure, but there is a place for active management”
Andrew Slimmon · 10:40

“So there's a place for both.”
Andrew Slimmon · 12:02

#passive investing#active management#portfolio allocation#index funds

Hot Take· 1

Hot Take10:58

Slimmon's Real Enemy Is the Closet Indexer

Slimmon argues that low-active-share funds with many tiny positions offer little meaningful differentiation from an index. He considers a supposedly favorite stock held at only 1.5% or 2% evidence that the manager's stated conviction is not reflected in portfolio construction.

Tiny positions contribute little even when they perform exceptionally well.
A manager's position sizing should reflect stated conviction.
Low-active-share funds may charge for results resembling an index.
Closet indexing damages the reputation of genuine active management.

“Well, you know that's ridiculous because even the stock doubles.”
Andrew Slimmon · 11:17

“My enemy is really, uh, it's the closet, the closet indexers, because I think they're bringing a bad name to you know, to active managers.”
Andrew Slimmon · 11:33

#closet indexing#position sizing#fund fees#manager conviction

Explainer· 2

Explainer04:32

Why Concentrated Managers Need 80–90% Active Share

Slimmon says studies associate meaningful active management with active share between 80% and 90%. A portfolio can achieve that differentiation while still owning benchmark constituents, provided it owns relatively few of them and assigns meaningfully different weights.

Active share measures how much a portfolio differs from its benchmark.
Slimmon cites 80% to 90% as the relevant range.
Benchmark constituents can still appear in a high-active-share portfolio.
A small portfolio makes manager skill or failure more visible.
Reported outperformance evidence may include survivorship bias.

“Studies show that you need to have active share of somewhere between eighty and ninety percent, which means ninety percent of your of your portfolio…”
Andrew Slimmon · 04:46

“But higher active shares proven to outperform lower act to share over time.”
Andrew Slimmon · 05:42

#active share#benchmarks#fund management#performance

Explainer07:53

How Avoiding One Index Giant Can Drive Relative Returns

Broad benchmarks may contain hundreds of names while remaining heavily influenced by their largest constituents. Slimmon illustrates how not owning Apple helped his global portfolio when the stock struggled because Apple's large benchmark weight magnified the relative-performance effect.

A high constituent count does not eliminate index concentration.
Large benchmark weights create substantial active opportunities and risks.
An intentional zero weight can matter as much as an owned position.
Managers must understand the benchmark's actual composition.

“Apple had a very tough, good, tough first quarter, so that added a lot of relative performance to our portfolio because it's a big waiting…”
Andrew Slimmon · 08:18

“I think it's understanding what is the makeup of the index and identifying stocks you think will work and ones in being underweight, the ones…”
Andrew Slimmon · 08:33

#index concentration#apple#relative returns#benchmark risk

Story· 1

Story08:48

The European Bank Conversation That Changed Slimmon's Approach

At a London conference, an international manager told Slimmon that European banks had to be owned because they appeared in the manager's benchmark, despite being unattractive investments. The exchange reinforced Slimmon's preference for a global opportunity set unconstrained by regional quotas.

Regional mandates can force managers into unwanted holdings.
Benchmark inclusion is not an investment thesis.
A global mandate expands the pool of prospective opportunities.
Slimmon favors selecting the best ideas regardless of domicile.

“I don't like European banks either, but I got to own them.”
Andrew Slimmon · 09:49

“Let's just let's just find the best ideas we can, you know, around the world and just have a limited number of them.”
Andrew Slimmon · 09:55

#global investing#european banks#benchmarks#stock selection

Takeaway· 1

Takeaway12:08

Use a Concentrated Active Sleeve Beside a Cheap Passive Core

Ritholtz closes by proposing a core-and-satellite allocation: hold inexpensive broad-market exposure while assigning part of the portfolio to a differentiated, high-active-share manager. The active sleeve is intended to increase the possibility of outperformance without replacing the conservative core.

Keep broad passive exposure as the portfolio core.
Limit active exposure to a defined portion of the portfolio.
Choose a manager with high active share and meaningful differentiation.
Use the active sleeve to complement rather than imitate the index.

“Own a percentage of your portfolio in a concentrated set of holdings with an active manager with a high active share that marries up well…”
Barry Ritholtz · 12:11

“It can add a little sizzle to a conservative set of market holdings.”
Barry Ritholtz · 12:30

#core satellite#asset allocation#passive core#active sleeve