Don't Fear These Concentrated Funds
For these fund managers, the recipe for success means making bigger bets on fewer stocks.
Given the barrage of companies seeking financial rescue in this economic downturn, investors may be inclined to avoid concentrated funds because they could hold big positions in suddenly troubled firms. True, portfolios with scores of stocks may court less stock-specific risk, but managers of concentrated funds are forced to be disciplined and buy only the most promising stocks. Essentially, the manager can dig deeper into each stock in the portfolio and let his best ideas shine through.
While concentration is an effective tool, it needs to be in the right hands. Using the Premium Screener, we created a screen to find managers who have built strong long-term records using more-concentrated approaches. We limited the screen to domestic stock funds (excluding specialty-stock categories) with top-third trailing 10-year records, making sure that the current manager was responsible for that record. To zero in on concentrated portfolios, we required that at least 50% of assets be invested in the top 10 holdings. We also made sure that the funds had average or below-average Morningstar Risk ratings. (This rating assesses performance swings of a fund's monthly returns compared with category peers', and it penalizes funds more for downside swings because investors tend to be more sensitive to losing money than they are about earning big returns.) Finally, we required below-average fees and investment minimums of less than $10,000.
Click here to run the screen yourself. The Premium Screener returned the following results as of March 2, 2009:
Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.