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Manager Question of the Month: How Active Fund Managers Cope With Index Concentration

Managers from T. Rowe Price, Wellington, American Century, and others discuss the trade-offs.

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Equity benchmarks have gotten more concentrated, creating challenges for active managers who measure their performance against them. The problem has become acute for U.S. large-cap growth managers, who are often paid to beat the Russell 1000 Growth Index, which is now dominated by just a handful of technology-related companies.

This is more than a matter of personal preference or differing investing styles. To qualify as a diversified-stock offering, the SEC bars funds from devoting more than 5% of their portfolios to one stock or from owning more than 10% of a single company's stock. Those restrictions apply to three fourths of a mutual fund's assets, so managers still have 25% of their portfolios to concentrate elsewhere. For example, a manager could choose to concentrate 25% of assets in one stock or 12.5% in each of two stocks without violating the SEC's diversification strictures.

Linda Abu Mushrefova has a position in the following securities mentioned above: AMZN, GOOG, TRBCX, MSFT. Find out about Morningstar’s editorial policies.

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