Diversification Is Dead, Long Live Diversification!

Fiduciaries should use better benchmarks for skilled active managers. If using a capitalization-weighted benchmark, they should allow dynamic tracking: lower tracking when the benchmark is concentrated and higher tracking when it is diversified. The components of “active management” are domain experience, data extraction, and digital excellence. The goal of a systematically quantitative process is to “outperform” by creating an expert system. If successful, the process adds value in excess of an alternative. The dominant <italic>alternative</italic> (benchmark) that has survived and thrived is a cap-weighted index of 500 traded stocks created by Standard & Poor’s in 1957. However, the S&P 500 Index as a portfolio has in recent years lost much of the benchmark-essential requirement—efficiency in diversification. Is the well-known Mark Twain quote relevant when applied to index diversification: “The reports of my death are greatly exaggerated”?