Factor Performance vs Portfolio Concentration – II
The more concentrated, the higher the returns, right?
December 2025. Reading Time: 10 Minutes. Author: Nicolas Rabener.
SUMMARY
- Smart beta returns vary significantly with portfolio concentration
- Betas and factor performance impact returns
- Value and momentum portfolios should be concentrated, others not
INTRODUCTION
In our recent research article, Factor Performance vs Portfolio Concentration, we showed that in the U.S. market, more concentrated long-only, stock-based portfolios benefited value and momentum strategies over the past 20 years. For other factors – such as growth, low volatility, quality, and size -the opposite held true: greater diversification delivered better results.
The simplest explanation for this pattern is that it merely reflects underlying factor performance. Value and momentum factors produced positive returns over the period, while the others did not. A more concentrated portfolio naturally amplifies factor exposures, and thus magnifies returns when those factor premia are positive.
A second explanation, however, is that portfolios exhibit different market betas. Low-volatility stocks, for example, typically have betas below one; a highly concentrated low-volatility portfolio would have an even lower beta, virtually ensuring underperformance in a bull market.
In this follow-up article on portfolio concentration, we explore how beta influences observed performance.
FACTOR PERFORMANCE VS PORTFOLIO CONCENTRATION
The chart below summarizes our previously published results, showing the excess returns of equal–weighted, factor-focused portfolios relative to the U.S. stock market from 2005 to 2025. For value and momentum, greater portfolio concentration was advantageous, while for the other four factors, broader diversification delivered better performance.
