The Costs of Overdiversification

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. The authors, Shawn McKay, CFA, Robert Shapiro, CFA, and Ric Thomas, CFA, review the number of external investment strategies held by the largest US public and corporate pension funds. The analysis shows that most large pension funds are overdiversified, allowing the authors to suggest a simpler framework for moving forward.

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