The investment case for diversification
Hosking Partners is a London boutique founded in 2013 by Jeremy Hosking, a portfolio manager at Marathon Asset Management for over 25 years. It runs a single global equity strategy built on the capital-cycle, supply-side approach — contrarian, long-term, and unusually diversified (350+ holdings) under a multi-counsellor model, managing around $5.5bn.
In plain words
This report argues against the popular idea that you need to concentrate your bets on a few stocks to make money. Instead, it claims diversification—spreading investments across many stocks—is the better path. The author's own firm, which holds about 370 stocks, returned 33.5% in 2025, beating the global market by 11% with lower risk. For regular investors, this means don't just chase hot tech giants everyone is piling into. Instead, consider a fund that carefully picks hundreds of stocks. It's worth reading because it uses real data to challenge the crowd's thinking.
This report explores the value of diversification in the current market. Although Harry Markowitz referred to diversification as "the only free lunch in investing," market trends are leaning toward concentrated holdings: passive funds are increasingly concentrated, with technology, media, and teleco
Theme and Background
This chapter delves into the paradox of value surrounding "diversified investment" in today's market environment. Although Harry Markowitz hailed diversification as "the only free lunch in investing," market trends have clearly shifted toward concentrated holdings: passive funds are increasingly concentrated in a handful of large-cap stocks, while active fund managers generally champion concentrated investing to demonstrate "conviction." The report argues that, amid this market consensus, the true opportunity for excess returns lies instead in diversified active management portfolios.
Core Thesis
The author explicitly refutes four mainstream criticisms of diversified investing, deeming them a mistaken consensus. The core investment argument is: In the current environment of extreme market concentration, a carefully constructed diversified active management portfolio (such as Hosking Partners' portfolio of approximately 370 stocks) can not only generate returns that diverge significantly from the index but also outperform the market with lower volatility, delivering genuine excess returns. This stands in direct opposition to the prevailing view that "only concentrated holdings can make money."
Key Arguments and Data
1. Historic Extremes in Market Concentration: Currently, the market-cap weight of technology, media, and telecom stocks in the S&P 500 index has exceeded the level seen during the 1990s internet bubble. This indicates that passive strategies themselves are no longer "diversified"; rather, they exacerbate market crowding.
2. Diversification ≠ "Index Tracking": The author refutes the view that "diversification is merely index tracking disguised as active investing." They point out that among the global universe of 40,000 listed stocks, the number of possible diversified portfolios containing 400 stocks is greater than the number of atoms in the universe, offering infinite variety.
3. Performance as Counterevidence: As the most powerful piece of evidence, Hosking Partners' portfolio, which holds approximately 370 stocks, delivered a net return of 33.5% in 2025, outperforming the MSCI ACWI index by approximately 1,114 basis points (11.14%). This demonstrates that a diversified portfolio can differ significantly from the index and achieve substantial success.
4. Refuting "Concentration Implies Conviction": The author argues that an investor's goal should be to "maximize returns" rather than "maximize risk." They favor a "fat tail" approach (capturing multiple opportunities through diversification) over "swinging for the fences."
5. Limits of Information Processing Efficiency: The report cites a 1973 study on horse-race prediction. That study showed that when the number of variables used by experts increased from 5 to 40, prediction accuracy did not improve, but the experts' confidence increased. This supports the author's view that excessive research on individual stocks creates an "illusion of control."
6. Academic Research Support: The report references a 2010 study by Bennett and Sias, which explicitly states that the traditional view—that holding 8 to 30 (or even 50) stocks is sufficient for adequate diversification—is "erroneous." Risk-adjusted returns continue to improve as the number of holdings increases to several hundred.
7. Volatility Advantage: Since its inception in 2013, Hosking Partners' portfolio has not only outperformed the MSCI ACWI Value index but has also done so with lower volatility.
Companies/Assets Involved
- Hosking Partners (the author's firm): An active management firm advocating deep diversification.
- Role: Practitioner and empirical case study for the investment thesis.
- Key Data:
- Portfolio holdings: Approximately 370 stocks.
- 2025 net return: 33.5%.
- 2025 excess return: Outperformed the ACWI index by 1,114 bps.
- Volatility: Lower than the MSCI ACWI Value index since inception in 2013.
- Bullish: On the firm's own strategy. They believe their "multi-advisor" framework and capital-cycle perspective can effectively construct a truly differentiated global diversified portfolio.
- "Crowded" Assets in the Market (e.g., TMT large caps):
- Role: Counterexample, representing areas where valuations have been inflated by both passive and concentrated active funds.
- Judgment: These assets are approaching their "best before date," with valuations elevated due to crowded flows.
- MSCI ACWI Index & MSCI ACWI Value Index: Used as performance benchmarks.
- The author aims to outperform these indices and has achieved this with lower volatility.
Investment Implications
1. Strategy Shift: For investors seeking genuine excess returns, blindly following the "concentrated holdings" trend is inadvisable. The current momentum-driven index concentration and large-cap crowding create contrarian opportunities. A diversified active management approach may be the superior choice.
2. Beware the "Illusion of Control": Investors should avoid over-researching a small sample of stocks, as this can lead to false confidence rather than greater accuracy. A more effective approach is to allocate research effort across a large number of stocks with similar probability of opportunity.
3. Redefining "Diversification": The traditional idea that "holding 20-30 stocks is sufficient" has been academically disproven. An effective diversified portfolio may require several hundred stocks, aiming not only to reduce risk but also to capture incremental returns by assuming a broader set of uncorrelated idiosyncratic risks.
4. Specific Allocation Direction: Consider allocating to active management funds that employ deep diversification strategies with a proven track record, such as Hosking Partners, to balance the risk of core large-cap indices or concentrated funds. This means investing in a player who "fishes in a large pond" rather than crowding into "waters crowded with fishermen."