The Power of Many – Revisited

This paper is an extension of our recent research paper that analyzed how portfolio breadth influences the performance, consistency, and risk profile of Momentum strategies (see The Power of Many – How Portfolio Breadth Shapes Momentum Outcomes). In this latest study, we test how the number of holdings affects outcomes of three additional style factor strategies: Value, Growth, and Quality.

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A Study on Portfolio Breadth in Value, Growth and Quality Strategies

We recently published research that analyzed how portfolio breadth influences the performance, consistency, and risk profile of Momentum strategies (see The Power of Many – How Portfolio Breadth Shapes Momentum Outcomes). As an extension of that work, we test how the number of holdings affects the performance of three additional style factor portfolios: Value, Growth, and Quality.

Value is defined as the top quintile of Book-to-Price (B/P), calculated as common equity divided by market value (market price multiplied by common shares outstanding). Growth is defined as the inverse of Value and represented by the bottom quintile of B/P. Quality is defined as the top quintile of Return on Equity (ROE), calculated as trailing 12-month net income divided by total shareholders’ equity, with equity averaged across aligned historical reporting periods.

Portfolios were constructed as long-only, market-capitalization-weighted strategies and reconstituted annually at June month-end. Portfolio weights were rebalanced monthly based on market capitalization. For a full description of universes and methodology, please see Appendix A.

Universes Analyzed:

US Large Cap (Russell 1000 proxy)

US Mid Cap (Russell Mid Cap proxy)

US Small Cap (Russell 2000 proxy)

US Micro Cap (Russell Microcap proxy)

MSCI ACWI ex USA

MSCI ACWI ex USA Small Cap

MSCI ACWI

MSCI ACWI Small Cap

MSCI Emerging Markets

MSCI Emerging Markets Small Cap

Like the momentum breadth study, for each factor and within each universe we generated twelve random subsets representing varying levels of portfolio breadth. These ranged from a single holding to 90% of the full factor quintile. Each level of portfolio breadth was simulated across 30 independent random samples. This design allowed us to capture both the central tendency and dispersion of possible outcomes, while testing whether holding only a subset of the factor cohort could replicate or potentially improve upon the characteristics of the full quintile portfolio.

Conclusion

Extending our analysis beyond momentum to the Value, Growth, and Quality style factors reveals meaningful differences in how portfolio breadth influences factor outcomes. For Growth and Quality, broader portfolios tend to deliver stronger risk-adjusted performance across most universes, consistent with the patterns observed in the momentum breadth study.

Value, however, exhibits a less consistent monotonic relationship between breadth and performance. In many universes, risk-adjusted results peak at moderate levels of diversification and may decline as portfolios broaden further. This suggests that the diversification benefits of additional breadth can eventually be offset by dilution of the Value signal and the inclusion of “value traps.”

Despite these differences in return profiles, a consistent theme emerges across all three factors: diversification benefits emerge quickly. Measured by tracking error, the largest reductions in risk occur early as portfolio breadth expands, with diminishing incremental improvements as portfolios become broader. Increasing breadth also materially improves outcome stability. As portfolio name count rises, dispersion narrows meaningfully, indicating greater reliability of realized results. Narrow, concentrated implementations exhibit substantially wider variability across random samples, while broader portfolios deliver more consistent outcomes.

Ultimately, portfolio construction is not one-size-fits-all. While broader implementations generally enhance robustness and repeatability, the optimal breadth depends on the factor’s underlying economic drivers and the extent to which diversification strengthens the intended signal.