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Fund Spy: Morningstar Medalist Edition

The Most Concentrated Stock Funds We Rate

A look at the dispersion of Analyst Ratings for some of the most focused equity funds in Morningstar's coverage universe.

Be careful for what you ask for when looking for a concentrated equity fund--you might get exactly what you want. Funds that limit their holdings to those in which their managers have the highest conviction offer the promise of bigger returns, but also the risk of having too much in a particular stock or group of stocks at the wrong time. Morningstar analysts weigh these opportunities and pitfalls when rating funds run by high-conviction managers.

Here's a look at how the Morningstar Analyst Ratings shake out for the most focused of our rated funds, which for this article are defined as those with fewer than 30 holdings, significantly more money in their top holdings than their respective Morningstar Category average, and more than a third of their assets in at least one sector.

Most Concentrated Player
Silver-rated  Fairholme (FAIRX) is by far the most concentrated equity fund that Morningstar rates. Manager Bruce Berkowitz dives into other managers' "too hard" piles and has no qualms about piling into the few stocks he finds attractive there. For example, he remains a big owner of Fannie Mae and Freddie Mac even though many believe that these two entities will be wound down and shareholders will get nothing. The fund as of March 31, 2015, owned 10 stocks, including a 28% stake in  American International Group (AIG) and a 17% position in  Bank of America (BAC). Berkowitz's intrepid and patient approach has produced topnotch returns during the last 15 years, but the price has been periodic spasms of terrible relative performance, such as in 2011 and 2014. The fund's extreme concentration and affinity for deeply out-of-favor securities with uncertain payoffs make it an acquired taste for all but the most dauntless of investors.

Late in the Shot Clock
Disappointing performance since Davis Advisors took this fund over in 2006 and a comanager change in 2014 explains why  Clipper's (CFIMX) Analyst Rating has slipped all the way to Bronze from Gold since its first rating in 2011. Attractive fees, big manager ownership, and a better long-term record at a similar separate account keep the rating from dropping further. The fund had 21 holdings--seven in the financial sector--as of April 30. It has gained a cumulative 58% since Chris Davis and Ken Feinberg took over in January 2006 through the end of April, but the average large-blend fund has gained 84% and the S&P 500 103% in that time.

That's not good, which is reflected in the fund's Performance Pillar score of Negative. The shot clock, however, partially reset for this fund in the first month of 2014 after Davis Advisors fired Feinberg and replaced him with longtime analyst Danton Goei, who had posted strong results in his sleeve of the analyst-run  Davis Opportunity (RPEAX). Clipper has continued to lag its average peer and benchmark since then, but that's a short period in which to judge the new partnership. Also Chris Davis has achieved better results at a separate account he has run since 1997 with the same low-turnover, bottom-up best ideas approach. Davis Concentrated Equity has gained 400% cumulatively from March 1997 to April 2015 compared with the S&P 500's 279% and the average large-blend fund's 213%. Clipper's fees also remain below average and Davis, his family, and employees have more than $100 million in the fund, or about 10% of its assets, according to Clipper's most recent annual report.

Transition Game
 FPA Perennial (FPPFX), with 30 holdings, isn't quite as concentrated as Fairholme or Clipper in terms of individual stocks. But it has nearly three fourths of its assets in two sectors--consumer discretionary and industrials--and will let some positions, such as top holding  O'Reilly Automotive (ORLY) grow into double-digit stakes. The Silver-rated fund, on average, has attractive quality measures such as returns on assets and earnings and debt/capital. But high-quality is not the same as risk-free. Managers Eric Ende and Greg Herr tend to let assets cluster where they find them and are apt to stay put when the market votes against their holdings if they think the fundamentals still look strong. The fund has a strong record over the 16 tenure of senior manager Ende, but he lost his longtime comanager, Steven Geist, to retirement in 2014. Current comanager and heir apparent, Herr, while qualified, is still building a track record here.

Streaky Shooter
High fees weigh on Silver-rated  AMG Yacktman Focused's (YAFFX) rating. It has a superlative long-term record and arguably could be considered for Gold, but its 1.22% expense ratio is well above the means for large-blend funds and no-load large-cap funds overall. The fund's high-conviction approach--which presently has produced a portfolio with 17% in cash and the rest in 28 mostly giant-cap stocks--also can generate shorter-term relative returns that can be difficult for some investors to endure. It has lagged the peer group and S&P 500 six times in the last 10 calendar years.

Steady Floor Game
 Oakmark Select (OAKLX) is the only Gold-rated highly concentrated fund. Manager Bill Nygren certainly has his dry spells, such as when a huge stake in doomed bank Washington Mutual drove the fund to a bottom-decile-ranking loss in 2007. Overall, though, Nygren has managed to compensate shareholders over time for the risks of this portfolio, which held about 20 holdings as of March 31 and has more than 40% of its assets in financial-services stocks and another 25% in technology shares. Despite the large financials stake, the fund seems less likely to make the same mistake it made with Washington Mutual, which Nygren let grow to more than 15% of the portfolio in 2007. The fund's largest holding is payments company  MasterCard (MA) at 7.6%, and it has spread its bank bets across  Citigroup (C), Bank of America, and  JPMorgan Chase (JPM), which Nygren contends are selling too cheaply, even considering their more conservative growth prospects.

Contract Distractions
Neutral-rated  Marsico Focus (MFOCX) and its clone  Columbia Marsico Focused Equities (NFEAX) are the only non-Morningstar Medalist funds in this concentrated group. Performance has been spotty and staff turmoil has been high in recent years at Marsico. The funds managed to underperform in recent years even with large stakes in health-care stocks, including 15% in biotech, which have been hot. High fees and a fair amount of comanager and analyst turnover damp enthusiasm for the funds. The firm began to wrestle with debt issues following a highly leveraged deal by Tom Marsico to buy his firm back from Bank of America in 2007 and increased outflows in subsequent years. Personnel turnover then spiked; several portfolio managers (including Douglas Rao, the funds' comanager) left, as did a number of analysts.

For a list of the open-end funds we cover, click here.
For a list of the closed-end funds we cover, click here.
For a list of the exchange-traded funds we cover, click here.
For information on the Morningstar Analyst Ratings, click here.

Dan Culloton has a position in the following securities mentioned above: CFIMX. Find out about Morningstar’s editorial policies.