Divide and Conquer: Active Equity Portfolio Management with Concentrated Benchmarks

With historically high and persistent market concentration, benchmarks globally have become dominated by a few mega-cap stocks, limiting active managers’ ability to express their views, straining their investment process and risking crowded positions. In this article, we analyze this investment problem from the perspective of both the asset owner and the active manager to whom capital is delegated. We propose a “benchmark-splitting” solution for asset owners, using a diversified capped benchmark for active mandates while passively holding a completion portfolio for the excess concentration. Our simulations with stock-specific and factor-based signals indicate that in highly concentrated markets, splitting the benchmark may benefit both asset owners and asset managers. The approach allows managers to express their stock-specific views more fully, boosting their signal exposure and portfolio breadth. Importantly, at low-to-medium tracking-error levels, asset owners do not sacrifice overall alpha despite retaining the completion portfolio. These results hold across pure stock-picking and multifactor-based strategies.