Special Report: DiWORSEification--Managing the Threat of Closet Indexers

There are few subjects more important to investors (and yet likely more overlooked) than that of portfolio management, the notion of managing a collected body of stocks rather than a series of individual positions. We have our own thoughts on the subject, but so do our members--professionals managing assets on behalf of clients.

Kyle Mowery, managing partner of GrizzlyRock Capital, has authored a controversial, but well-reasoned whitepaper entitled "Diworseification: How Investors Can Avoid the Scourge of Overdiversification with Best Idea Funds". Whether you are fund manager, allocator, or individual investor, the implications of this subject are large and universal. Take notice.

Mr. Mowery asserts two, main points:

(1) that fund managers who employ traditional notions of position diversification as prescribed by Modern Portfolio Theory and other academic philosophies are under-performing and are therefore under-serving their clients and;

(2) that the vast majority of mathematical value that can be derived from position diversification can be captured via a small number of unique positions as dictated by the Kelly Criterion.

Therefore, Mr. Mowery argues, investors should be inclined to invest their money alongside a combination of 'best idea funds' that carry a maximum of 20-25 individual stock positions. He goes into depth about why this issue exists and why more fund managers don't employ such an obvious approach.

Click Here to Download DiWORSEification

At SumZero, we endorse no specific ideology above any other (outside of the value-biased, fundamentally-driven nature of the individuals who work here), but we do offer our platform to investment professionals willing to take a stance and support that stance in a rational, well-supported manner. We trust you'll find this research to be a value-add in your learning.

Best Regards,
The SumZero Team