Rich Pzena: Why Returns Deteriorate As You Grow

Johnny HopkinsRichard PzenaLeave a Comment

In his recent interview on the ValueWalk Podcast, Rich Pzena discusses why returns deteriorate as you grow. Here’s an excerpt from the interview:

This is one of those businesses where the bigger that you get the harder it is to win. It’s almost the opposite of every other business which talks about economies of scale. This business when you get to a reasonable size, you don’t have to be big, you achieve the economies of scale but then as you take on more and more assets it becomes harder and harder to differentiate yourself. In fact you can take too much assets.

So if you’re building a concentrated portfolio of say thirty or forty stocks, which is what I was involved in at Sandford Bernstein, what we do here, and you keep taking more assets, eventually thirty stocks can’t absorb all the assets that you have accumulated and you start changing. Going to forty, then fifty, then you go to sixty. And by the time you get to your seventy fifth stock it’s not as good as your twenty fifth.

So you deteriorate the investment message. So one of the key tenets and dreams if you want to say I had when I started was to make sure we never took more assets than we could manage in the way that we were always managing it. You hired us for something, we’re still doing that. We’re not drifting in style, drifting in the number of holdings and that means you have to stop taking assets to the point when you reach capacity.

We’ve been religious about doing that in our history as a firm.

You can listen to the entire interview here:

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