Evaluating Alternative Weighting Schemes For Stocks In A Best Ideas Portfolio

As institutional investors have become more aggressive in deploying their capital, fund managers have become more creative with their product offerings. In this paper, we consider a new institutional fund of mutual funds, a portfolio that combines the best-idea stocks from two underlying primary funds. The sponsor of this portfolio has chosen to weight all of the stocks equally, even those chosen by both of the underlying funds’ managers. However, stocks chosen by both managers may be more likely to outperform. We propose an alternative weighting scheme, where these confirmed stocks are weighted more heavily. We show that this overweighting strategy leads to a higher expected portfolio return than does the equally weighted scheme used by the sponsor.