An article in the Chicago Tribune warns of the risks of mutual funds with too few holdings:
No equity-fund manager has made a clearer confession than William Nygren, co-manager of the Chicago-based Oakmark Select Fund, a so-called focus fund holding stocks in just 24 companies at the end of June. Fourteen percent of the fund was in mortgage lender Washington Mutual.
The fund's performance has been 'dreadful,' Nygren wrote to shareholders last month. So far in the quarter, the fund is down nearly 9 percent….Ed Maracinni, co-manager of the JohnsonFamily Large Cap Fund in Racine, Wis., said the pessimism in stocks has been overdone, apart from financial and real-estate-related stocks. The fund is down nearly 5 percent in the current quarter….This summer's concentrated disasters prove the risk of narrow bets on a few stocks or a few sectors..."
We’d counter with "Too much diversification spells mediocrity for most stock funds".
While it is true that diversification lowers risk, it also reduces upside. At MAXfunds we tend to prefer more focused funds with fewer than 100 holdings (in fact it has been a component of our ratings and is highlighted on each funds data page). While these funds can fall the hardest in down markets, they tend to outperform in up markets. Why is this a good thing?
First of all, over the longer haul, markets tend to go up more than they go down. Second, funds with too many holdings tend to act like index funds – only with the performance drag of higher fees. If you want broad diversification, stick with ultra cheap total market index funds. Third, too many holdings can be the result of too much money in a portfolio, leaving the portfolio manager little choice but to add more and more picks (or bigger and bigger stocks).
You choose actively managed funds because you believe a fund manager has skill in picking stocks. If so, wouldn’t you prefer owning his top 10-50 ideas? Why would you want his next 500 best ideas? If you want more diversification, own a few concentrated funds in different fund categories rather than trying to have one fund solve all your diversification issues.
Be aware that even thirty stocks can be a fairly low risk diversified portfolio if the stocks are evenly distributed in the portfolio and from different industries and are a mix of value and growth, small and larger cap. Even the Dow with its thirty stocks is safer than a single sector fund that may own one hundred stocks - or even the Nasdaq as a whole, with thousands of stocks.
An article in the Chicago Tribune warns of the risks of mutual funds with too few holdings:
No equity-fund manager has made a clearer confession than William Nygren, co-manager of the Chicago-based Oakmark Select Fund, a so-called focus fund holding stocks in just 24 companies at the end of June. Fourteen percent of the fund was in mortgage lender Washington Mutual.
The fund's performance has been 'dreadful,' Nygren wrote to shareholders last month. So far in the quarter, the fund is down nearly 9 percent….Ed Maracinni, co-manager of the JohnsonFamily Large Cap Fund in Racine, Wis., said the pessimism in stocks has been overdone, apart from financial and real-estate-related stocks. The fund is down nearly 5 percent in the current quarter….This summer's concentrated disasters prove the risk of narrow bets on a few stocks or a few sectors..."
We’d counter with "Too much diversification spells mediocrity for most stock funds".
While it is true that diversification lowers risk, it also reduces upside. At MAXfunds we tend to prefer more focused funds with fewer than 100 holdings (in fact it has been a component of our ratings and is highlighted on each funds data page). While these funds can fall the hardest in down markets, they tend to outperform in up markets. Why is this a good thing?
First of all, over the longer haul, markets tend to go up more than they go down. Second, funds with too many holdings tend to act like index funds – only with the performance drag of higher fees. If you want broad diversification, stick with ultra cheap total market index funds. Third, too many holdings can be the result of too much money in a portfolio, leaving the portfolio manager little choice but to add more and more picks (or bigger and bigger stocks).
You choose actively managed funds because you believe a fund manager has skill in picking stocks. If so, wouldn’t you prefer owning his top 10-50 ideas? Why would you want his next 500 best ideas? If you want more diversification, own a few concentrated funds in different fund categories rather than trying to have one fund solve all your diversification issues.
Be aware that even thirty stocks can be a fairly low risk diversified portfolio if the stocks are evenly distributed in the portfolio and from different industries and are a mix of value and growth, small and larger cap. Even the Dow with its thirty stocks is safer than a single sector fund that may own one hundred stocks - or even the Nasdaq as a whole, with thousands of stocks.
Funds mentioned in this article:
Oakmark Select I (OAKLX)
JohnsonFamily Large Cap Value (JFLCX)
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