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Fund Spy

Rising Concentration Points to New Risks

These funds have become more concentrated among top holdings during the past three years.

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 Valeant Pharmaceuticals(VRX) recent plunge--and the pain endured by its largest shareholders--highlights the risks of taking large bets on individual companies. Several fund managers held sizable stakes in the stock, though  Sequoia (SEQUX) stood out for its position, which reached 29% of fund assets in mid-2015. The fund lost 22% from August 2015 to November 2015 as Valeant’s stock price fell 65% on allegations of fraud and aggressive pricing practices.

That’s not to say investors should avoid concentrated funds. Patient investors with long horizons may find much to like with them. In fact, Morningstar’s analysts assign Sequoia a Morningstar Analyst Rating of Gold, reflecting their view that it is a best-of-breed fund for investors willing to ride out short-term bumps. Still, it is worth noting when a fund’s concentration markedly changes. Hopefully investors realized that Sequoia’s stake in Valeant had more than tripled as a percentage of the portfolio during the past three years. Keeping an eye on such changes helps keep investors apprised of the risks they face.

Leo Acheson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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