A fund’s annual (three-factor) alpha decreases by 26 basis points when an extra manager comes on board. Every extra manager to be added to a fund constitutes an additional drag on performance, of up to 128 basis points.
However, more managers also has a benefit for investors, as expense ratios are lowered by up to 47 basis points when the management design is changed from a single manager to multiple managers.
Importantly, these results are also valid in reverse. So if the number of managers on a fund is cut, performance improves and the portfolio becomes more concentrated.
The study also confirms previous research that funds with concentrated portfolios perform better. Funds run by a single manager tend to have higher portfolio concentration, both across and within sectors, than funds with multiple managers, which gives star managers an additional edge.
As a fund’s portfolio becomes more concentrated in a few industry sectors, its performance improves significantly, the authors show. When relative portfolio concentration moves from the lowest quartile to the top-quartile, a fund’s annual performance improves by more than 3%.
However, the sample used in the study has a lot of funds that could probably be classified as closet trackers. The 3895 funds used in their research have a staggering 144 holdings on average, with one of the funds (which is almost certainly a trackers of some sort) holding as many as 3025 stocks. As recent research by Nomura asset management showed that portfolio diversification benefits stop at 40 stocks, it’s likely that the performance of many of the funds in the study suffered from ‘overdiversification’.