Efficiency and diversification of compact portfolios in the context of the reform of the pension system in Chile

Abstract

The objective of this paper is to compare the levels of efficiency in the management of compact portfolios of high, medium, and low market capitalization. Additionally, quantify how well diversified each of the analyzed portfolios is by decomposing its total risk into its systematic and idiosyncratic components. The term “compact portfolio” is defined as a variable income stock portfolio made up of a small number of securities diversified in different industries with a low level of correlation between them. On the other hand, to ensure a suitable statistical distribution of returns, the selected assets are positioned in a bounded volatility range. In the context of the reform of the Pension System in Chile that is being debated in Congress, the function that generational funds will eventually play is analyzed, and the feasibility of investing part of the pension funds abroad in compact port-folios. Currently, the main vehicle for investment in foreign equities is through global mutual funds. This paper analyzes the advantages of investing in this type of portfolio, mainly in two aspects: first, having direct control over the asset selection process; and second, reduce the payment of commissions to only the moments of buying and selling shares, instead of paying an annual commission to a fund for the management of a stock portfolio.