Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
The team tasked with regularly reviewing funds on the list applies a two-part process which focuses first and foremost on funds’ investment merits, followed by a secondary assessment of customer benefits like discounts. The latest changes were prompted by the investment analysis phase of this process.
Specifically, our analysts pointed to the concentrated nature of the Lazard fund. Holding only around 19-24 companies in the fund means all names can have a meaningful impact on performance. While the management team likes the conviction in this approach, our team now sees other US-focused options with greater company and sector diversification which may be more suitable for long-term investors from a risk perspective.
The removal of the Baring fund comes after a downgrade from our sector analyst. While portfolio manager Robert Smith is an experienced and diligent investor, the fund’s exposure to small and micro-cap companies has not added value for a sustained period, over and above what a general exposure to small caps would have achieved.
The team also highlighted the manager’s growing selection of newly-listed and early stage companies. This has become a larger portion of the portfolio recently and has held back performance despite small caps continuing to outperform in Germany.
Concentration: a sign of conviction or lack of diversification?
Getting the balance right in terms of diversification can be tricky. Fund managers aim to fill their portfolios with enough good opportunities to achieve growth, but not too many so as to avoid diluting the impact these opportunities bring to the fund.
As we go about populating our own portfolios it’s important to keep in mind that more doesn’t necessarily mean better. We need to consider how a new addition to the portfolio changes our overall sector exposure, if it will raise or lower the overall quality of our holdings and how much time and effort it will require to keep on top of.
We can end up unknowingly creating a long tail of small positions in companies over the years, of which we fail to maintain an up-to-date knowledge. This is often one reason managers hold strict criteria on upper limits to the amount of companies they hold. This also allows them to make sure only their best ideas are represented in the fund, with positions having to justify inclusion constantly.
Of course, this can also mean missing out on broader opportunities in sectors not represented in such a small selection of companies.
For most of us, the balance comes in selecting funds run by managers with distinct, and often opposing, philosophies towards concentration. We are not forced to take big bets on certain strategies and can benefit from the funds in our portfolios passing the baton back and forth over the long term.
More on the Select 50
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.