Our Analysts' Favorite Core Concentrated Funds
These funds may reward investors with long time horizons and the wherewithal to hang in amid underperformance.
Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar.com. Equity investors generally prefer low-cost, well-diversified funds at the core of their portfolios. However, when used correctly, a concentrated fund run by an established, successful stock-picker may provide excess return over time to an otherwise diversified portfolio. Keep in mind though that concentrated funds require very long time horizons, and investors should have the wherewithal to hang on during the inevitable streaks of underperformance. That being said, we asked our analysts for some of their favorite core concentrated funds.
Alec Lucas: FMI Large Cap is a concentrated, value-leaning fund run by Fiduciary Management Incorporated based in Milwaukee. It's team-managed. Pat English is the longtime manager of the fund and he is backed by a sizable team including research director Jonathan Bloom. It invests in roughly 20 to 30 stocks. Portfolio turnover is low, and the managers aren't afraid to hold cash when valuations are stretched, which they believe they are currently.
It's a fund that you can count on for good downside protection, has a fantastic long-term track record. Fees are reasonable, especially for a fund that will close its asset base to new investors to protect current shareholders. It was closed, for example, between mid-2013 and mid-2016. It's a good option for investors who are worried about market valuations and want to have managers who invest alongside them.
Greg Carlson: Oakmark Select is a concentrated fund and owns roughly 20 stocks typically. Bill Nygren has been the lead manager since the fund's 1996 launch. He takes very big positions at the top of the portfolio at times, up to 10% or more of assets. However, he has controlled volatility on the downside over time through a time-tested, valuation-driven approach. The fund will own just about any type of company that trades at a significant discount to its prospects. Thus, the managers will own traditional value stocks such as a Citigroup, but they will also own stocks that are more associated with growth funds such as Alphabet, where the fund right now has a combined 8.4% position in the two share classes of that stocks. Over time, this has produced volatility. However, the fund's long-term returns are excellent on both the total return and risk-adjusted basis. We think it's a solid core holding for investors.
David Kathman: BBH Core Select is a concentrated fund that typically holds fewer than 30 stocks, and it's also a pretty solid core holding with a Morningstar Analyst Rating of Silver. It's managed by Tim Hartch and Michael Keller, who look for companies that dominate their market niches and generate a lot of cash flow without too much debt on their balance sheets. Valuation is also a big part of the process. The managers typically look for stocks that are trading at least 25% below their estimated intrinsic value, which they estimate using a discounted cash flow model.
It's a high-conviction fund that typically puts a lot of weighting to its top holdings. That can hurt returns when some of those top holdings run into problems in the short term, which is what has happened over the past year. But over the longer term, it has led to pretty solid results and really helped the fund stand out from its peers.
Greg Carlson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.