The fundamental idea behind C WorldWide Asset Management’s global strategy is to hold the best 30 stocks worldwide. This has been the case for more than 30 years where they have never owned more than 30 stocks in the portfolio.
We believe the most important consideration when deciding on the ideal number of stocks in a portfolio is how to balance the advantage of focus and specialized knowledge of the individual stock with the advantage of diversification. This is illustrated in figure 1.
For illustrative purposes only
The positive diversification effects of having more stocks in the portfolio is well known. You reduce the overall volatility by adding more stocks to the portfolio up to a certain point. After this point, the benefits of additional companies will not reduce the portfolio’s overall volatility significantly. Meir Statman proved this in an academic survey published in the Journal of Financial and Quantitative Analysis in September 1987. He concluded that the optimal number of stocks is 30 to 40, which is fewer than in most actively managed institutional portfolios.
An often overlooked risk factor is the loss of specialized knowledge about the individual company. There is a natural limit to the number of companies a decision maker or a decision team can truly understand and follow. In addition, companies and thematic trends need to be seen in a global perspective. It is essential to understand the central dynamics affecting the individual company to also monitor the cross dynamics within the portfolio. With too many stocks in the portfolio, you risk losing oversight and risk emphasizing mechanical risk analysis based on notoriously unstable historic patterns.
C WorldWide Asset Management believes that when balancing these two considerations there is a maximum and ideal number of stocks in an active managed global portfolio, and that number is 30.
There are at least three additional potential advantages of having a maximum of 30 stocks in a global portfolio:
We believe, over time, there are only a few listed companies that manage to create significant value. However, there are many average companies that do not create value over time, but only present themselves as occasional buying opportunities.
C WorldWide Asset Management focuses on the long-term. They carefully select 30 distinct companies from a universe of thousands of companies worldwide. Focusing on sustainable growth creates a particular focus and aims to increase the probability of attractive results.
You build up a certain positive relationship to things you own and have spent a lot of time on. This applies to stocks as well. For the typical investor, it may be therefore more difficult to sell a stock than it is to buy one.
With a strategy of a maximum of 30 stocks, C WorldWide Asset Management has to sell one in order to make room for a new position. This forces us to prioritize. This constant prioritization is an important discipline, as the company being added to the portfolio needs a better long-term risk/return profile compared to the company being sold.
It can be useful to analyze a portfolio’s quantitative risk profile. This analysis is typically based on historic price patterns. C WorldWide Asset Management knows that the historic price action patterns are notoriously unstable, so it is even more important to have an in-depth knowledge of the basic business model and other key factors driving the future performance in the portfolio. This increases the possibility of understanding future risks that may affect the entire portfolio.
A concentrated portfolio approach has been the backbone of C WorldWide Asset Management’s day-to-day work for over 30 years. It is deeply rooted in their philosophy. This concentration has shown its value over time and is key to the returns, that they have generated since 1990.
Just like in professional sports, competition within the investment community is intense. They have never had more than 30 stocks in their global portfolio. This simple principle has been C WorldWide Asset Management’s corner stone for more than 30 years, creating focus, discipline, and insight.
Investing entails risks and there can be no assurance that any investment will achieve profits or avoid incurring losses.
This material does not constitute investment advice and should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy.
The views expressed herein may not be reflective of current opinions, are subject to change without prior notice, and should not be considered investment advice.