Most mutual fund managers hold shares of dozens, sometimes hundreds, of companies in a bid for diversification.
Then there are those who run “concentrated” portfolios with only a handful of picks. On Wall Street that’s called having conviction. If the right stocks are selected, the fund can post outsized gains, as each holding has more weighting in the fund. If the wrong stocks are selected, it can spell doom.
We decided to look at mutual funds that are highly concentrated and see which stocks were favorites among their managers. Morningstar supplied the data, limiting the list to U.S. equity funds with 25 or fewer investment positions with the fund-research firm’s highest ratings of four or five stars. Morningstar included only the oldest share class for each fund.
We limited our list further to funds without front-end sales charges and funds with majorities of investments in common shares, as opposed to bonds, preferred shares, other mutual funds or derivative securities. This reduced the list to nine mutual funds.
The concentrated strategies aren’t cheap, as seven of the nine funds charge at least 1% a year for expenses. But that may be justified by outperformance or if the investor agrees with a manager’s strategy. We’ll show how those funds have performed, along with their expense ratios, below. But first let’s see which companies these money managers like best.
The nine concentrated funds held a total of 122 stocks in 119 companies (as three have two share classes each) as of the most recent month-end available to Morningstar. Here are the 11 stocks (in 10 companies) held by at least three of the funds, with performance and sales growth info:
Company Ticker Number of funds that own the stock Increase in sales per share - past 12 reported months from year-earlier period Total return - 2018 through June 26 Total return - 3 years Total return - 5 years Total return - 10 years Alphabet Inc. Class A GOOGL, +0.88% 5 24.8% 8% 105% 159% 328% Facebook Inc. Class A FB, +0.20% 5 46.0% 13% 126% 724% #N/A Alphabet Inc. Class C GOOG, +0.93% 4 24.8% 7% 110% #N/A #N/A Charles Schwab Corp. SCHW, -0.37% 4 16.2% 4% 62% 164% 185% Mastercard Inc. Class A MA, +2.03% 4 23.7% 30% 112% 256% 647% Visa Inc. Class A V, +1.31% 4 17.6% 17% 97% 201% 621% American Tower Corp. AMT, +0.63% 3 10.1% 1% 61% 113% 288% Booking Holdings Inc. BKNG, +0.90% 3 20.9% 17% 79% 149% 1507% Cognizant Technology Solutions Corp. Class A CTSH, +2.12% 3 13.1% 11% 24% 149% 388% Microsoft Corp. MSFT, +1.12% 3 20.3% 17% 135% 227% 359% O'Reilly Automotive Inc. ORLY, +1.25% 3 14.9% 17% 21% 155% 1107% Sources: Morningstar, FactSetMost of these companies are well-known. Two of them, Facebook and Alphabet, are part of the famous FAANG group of companies, which also includes Apple AAPL, +0.73% Netflix NFLX, +1.29% and Amazon.com AMZN, +2.47%
You may not be surprised by many of the managers’ favorites, but look at the increases in sales per share. Those numbers are very impressive across the board. (We looked at sales per share, rather than raw revenue, because the per-share numbers reflect the dilution from the issuance of new shares, as well as any reduction in the share count from buybacks.)
Concentrated funds’ performance and expensesHere are average returns for the funds, after expenses, compared with the S&P 500:
Fund Ticker Total return - 2018 through June 26 Avg. return - 3 years Avg return - 5 years Avg. return - 10 years Avg. return - 15 years Annual expense ratio Provident Trust Strategy Fund PROVX, +0.84% 6.1% 14.8% 14.4% 10.1% 10.7% 1.01% Matthew 25 Fund MXXVX, +0.96% -3.6% 9.4% 12.2% 14.1% 9.8% 1.08% AB Concentrated Growth - Advisor WPSGX, +0.56% 5.7% 9.8% 13.2% 11.3% 6.7% 0.97% Hennessy Focus Fund - Investor HFCSX, +0.37% 1.6% 7.6% 11.8% 12.4% 11.9% 1.50% Polen Growth Fund - Institutional POLIX, +1.05% 11.8% 14.8% 17.5% N/A N/A 1.00% Nationwide Diamond Hill Large Cap Concentrated Fund - Institutional Service NWGKX, +0.60% -2.5% 7.6% N/A N/A N/A 0.97% Akre Focus - Institutional AKRIX, +0.79% 8.7% 14.2% 15.9% N/A N/A 1.05% Edgewood Growth Fund - Institutional EGFIX, +1.11% 14.2% 18.2% 19.9% 12.0% N/A 1.00% AMG Yacktman Focused Fund - Class N YAFFX, +0.32% 2.9% 10.7% 9.5% 12.9% 10.3% 1.27% S&P 500 Index SPX, +0.62% 1.8% 11.3% 13.5% 10.2% 9.2% Sources: Morningstar, FactSetFor convenience, we have compared the performance of these funds to the S&P 500 Index. However, the funds have various strategies, so the comparison is not necessarily a fair one. The performance component of a Morningstar‘s ratings is based on the fund’s performance against peers with similar strategies. That being said, the majority of the funds have beaten the index for three-year performance. And among the six funds that have been around for 10 years, all but one have performed better than the S&P 500 SPX, +0.62%
If you consider investing in any of the funds listed here (or any others, for that matter), you need to do your own research to understand how the shares are distributed. There are many channels of distribution and the share classes listed here may not be the ones available to you.
Consider the expense of the classes you are offered and keep in mind that if you are investing through an adviser, the total return figures do not reflect the additional annual fees charged by him or her. Those fees can greatly reduce your long-term returns. The average fee charged by advisers in the U.S. is about 1%, per several studies, but fees vary significantly and might be negotiable.
