What Free Lunch? The Costs of Overdiversification

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Financial Analysts Journal
First Quarter 2018 | Vol. 74 | No. 1 | 15 pages
Source: CFA Institute
Shawn McKay, CFA Robert Shapiro, CFA Ric Thomas, CFA

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Institutional investors, charged with outperforming a policy benchmark, often allocate to external active managers in order to hit their return objective. The challenge is to do so without overdiversifying the plan. Hiring too many managers can significantly reduce active risk, leaving the plan with high fees and limited ability to outperform a policy benchmark. We review the number of external investment strategies held by the largest US public and corporate pension funds. Our analysis shows that most large pension funds are overdiversified, allowing us to suggest a simpler framework for moving forward.

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  • Portfolio Management:
    • Asset Allocation
    • ·
    • Endowment Funds and Foundations
    • ·
    • Equity Portfolio Management Strategies
    • ·
    • Investment Manager Selection
    • ·
    • Portfolio Construction and Revision
    • ·
    • Risk Management
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