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Does Portfolio Overlap Hold Answers?
A new paper looks at how much a fund’ s overlap with others predicts its performance. Is it a breakthrough or false hope? By Larry Swedroe
INVESTORS ARE STILL LOOKING FOR INVESTMENT MANAGers who can consistently generate alpha, finance’ s equivalent of the Holy Grail quest. Just as medieval knights of legend pursued miraculous powers, modern investors chase the elusive managers who can beat risk-adjusted benchmarks. Despite countless attempts to crack that code, most promising formulas either fail in real-world application or reveal fatal flaws under scrutiny( for instance, when they are not using the appropriate benchmarks in the first place).
The latest researchers to join the quest are Rocco Ciciretti, Ambrogio Dalò, and Giovanni Puopolo, authors of the September 2025 study“ Portfolio Overlap and Mutual Fund Performance.” As part of their study, the three investigated the cross-sectional distribution of performance among actively managed equity mutual funds to determine how much the managers’ future performance depended on their holdings not overlapping with those of other funds.
A Smarter Way To Measure Differentiation
The researchers didn’ t settle for simple stock-by-stock comparisons. Instead, they developed a sophisticated metric that captures the strategic positioning of fund managers within their entire peer group. This approach looks at whether managers are making deliberate, differentiated investment choices rather than following the herd.
Their comprehensive analysis examined nearly 1,800 active U. S. equity mutual funds from December 2005 to June 2022, testing whether portfolio overlap could reliably predict future per-
38 | FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2025 WWW. FA-MAG. COM