Hennessy & Associates manages a $30 million equity portfolio for the multimanager Wilstead Pension Fund. Jason Jones, financial vice president of Wilstead, noted that Hennessy had rather consistently achieved the best record among the Wilstead’s six equity managers. Performance of the Hennessy portfolio had been clearly superior to that of the S&P 500 in four of the past five years. In the one less-favorable year, the shortfall was trivial.Hennessy is a “bottom-up” manager. The firm largely avoids any attempt to “time the market.” It also focuses on selection of individual stocks, rather than the weighting of favored industries.There is no apparent conformity of style among Wilstead’s six equity managers. The five managers, other than Hennessy, manage portfolios aggregating $250 million made up of more than 150 individual issues.Jones is convinced that Hennessy is able to apply superior skill to stock selection, but the favorable returns are limited by the high degree of diversification in the portfolio. Over the years, the portfolio generally held 40–50 stocks, with about 2%–3% of total funds committed to each issue. One committee member was particularly enthusiastic concerning Jones’s proposal. He suggested that Hennessy’s performance might benefit further from reduction in the number of issues to 10. If the reduction to 20 could be expected to be advantageous, explain why reduction to 10 might be less likely to be advantageous. (Assume that Wilstead will evaluate the Hennessy portfolio independently of the other portfolios in the fund.)
Hennessy & Associates manages a
$30 million equity portfolio for the multimanager Wilstead Pension Fund. Jason Jones, financial vice president of Wilstead, noted that Hennessy had rather consistently achieved the best record among the Wilstead’s six equity managers. Performance of the Hennessy portfolio had been clearly
superior to that of the S&P 500 in four of the past five years. In the one less-favorable year, the shortfall was trivial.
Hennessy is a “bottom-up” manager. The firm largely avoids any attempt to “time the market.”
It also focuses on selection of individual stocks, rather than the weighting of favored industries.
There is no apparent conformity of style among Wilstead’s six equity managers. The five managers, other than Hennessy, manage portfolios aggregating $250 million made up of more than 150 individual issues.
Jones is convinced that Hennessy is able to apply superior skill to stock selection, but the favorable returns are limited by the high degree of diversification in the portfolio. Over the years, the portfolio generally held 40–50 stocks, with about 2%–3% of total funds committed to each issue.
One committee member was particularly enthusiastic concerning Jones’s proposal. He suggested that Hennessy’s performance might benefit further from reduction in the number of issues to 10.
If the reduction to 20 could be expected to be advantageous, explain why reduction to 10 might be less likely to be advantageous. (Assume that Wilstead will evaluate the Hennessy portfolio independently of the other portfolios in the fund.)
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