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Three Flavors of Focused Funds

To say a manager is concentrating bets doesn't tell the whole story.

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Some investors want their equity-fund managers to demonstrate conviction. They want managers to buy only companies in which they have the utmost confidence, not to go on and add scores of other names for the sake of supposed diversification. Though compact portfolios are in the minority, several well-known funds are among those relying on this "focused" approach.

Not all focused funds are alike, however. The managers of such funds can follow aggressive or conservative stock-selection strategies and provide varying amounts of diversification by sector or region. Even at the most basic level--concentration by stock--such funds can be very different in a way often overlooked by investors. A few managers who own a relatively small number of stocks raise their level of conviction even further by pouring assets into a handful at the top. Conversely, some others who buy a limited amount of names don't make large bets on any of them. Still others fall in between.

Any of these approaches can work well or fall short. But they do carry different types of risks. Therefore, even investors who want a focused fund must investigate the details of the portfolio itself, not just the number of holdings, when deciding whether or not a fund truly suits them.

Gregg Wolper has a position in the following securities mentioned above: PFE, MSFT. Find out about Morningstar’s editorial policies.