| NEW YORK
NEW YORK May 22 Investors have been flocking to
highly concentrated stock mutual funds in the hope that more
daring bets will produce bigger returns, but it hasn't worked
out that way.
So-called concentrated mutual funds - those that hold fewer
than 30 stocks and are by nature risky - are growing far faster
than other types of actively managed funds. But some 80 percent
of these funds are posting performances that put them in the
bottom half of their peers, according to data from S&P
Over the five years to December 2013, the assets invested in
concentrated funds jumped from $44.5 billion to approximately
$117 billion, according to data from fund tracker Morningstar, a
growth rate 67 percent greater than actively managed funds as a
The move to riskier funds may come, ironically, as a side
effect of the growing popularity of passive index funds that
only track market benchmarks. As indexing becomes mainstream,
investors who choose to add any active funds to their portfolios
are increasingly opting for those that offer the greatest chance
of outperformance, even it comes with more risk.
The aging bull market and record-high stock prices,
meanwhile, have convinced some financial advisers that they need
to be more strategic and less sweeping in their bets.
"In order to beat the market you have to do something that
ETFs don't, which is using specialized knowledge to know which
areas or stocks to overweight," said Jeff Tjornehoj, head of
Lipper research in the U.S. and Canada.
SMALLER FIRMS, FOCUSED FUNDS
Concentrated funds tend to be put out by smaller firms in
the hope that strong performance will lead to asset growth.
That worked especially well for performance outlier the
Matthew 25 Fund, which has seen its assets grow almost
4,000 percent in just over five years with average annual
returns of 29.9 percent.
It dwindled to as low as $22 million in assets under
management during the 2008 financial crisis. Since then,
portfolio manager and firm founder Mark Mulholland has seen his
portfolio, heavy in positions in Apple, outdoors
retailer Cabela's, and snowmobile maker Polaris
Industries, put him in the top 1 percent of the 1,305
large-cap growth funds tracked by Morningstar. The fund now
holds $828 million in assets.
"The only reason you diversify is to reduce risk and the
only reason you concentrate is to increase return," he said.
He has approximately 13 percent of his portfolio in Apple,
his top position, because he expects the company to continue to
be a major player in the shift from PCs to handheld devices like
iPhones and tablets and remains one of the cheapest stocks in
his portfolio by instrinic value, he said.
Even funds that have not posted such outsized returns have
been pulling in investor dollars. The largest concentrated fund,
the FMI Large Cap fund, saw its assets rise from
approximately $1.5 billion under management at the end of 2008
to $8.7 billion today, even while posting returns that fell in
the bottom half of all large cap funds, said Todd Rosenbluth,
director of fund research at S&P CapitalIQ.
Advisers who have moved more money into concentrated funds
say they were hesitant to invest in the broad market now that
the rally has made it harder to find compelling values.
"The managers we like have flexibility and if they aren't
finding opportunities they can be out there in cash," said
Curtis Holden, a senior investment officer at Tanglewood Wealth
Management, a Houston firm that oversees approximately $800
million in client assets.
"We've shifted a little more away from index funds not
because we don't believe that they're efficient but because
we're getting a little more cautious after the run-up the
market's had," he said.
(Editing by Linda Stern; Editing by Chizu Nomiyama)