November 10, 2015 / 12:27 AM / 2 years ago

Valeant meltdown puts spotlight on big mutual fund bets

BOSTON (Reuters) - Mutual fund Sequoia’s loss on Valeant Pharmaceuticals International underscores the danger of placing a big bet on an individual stock. But while Sequoia is an extreme example, it is not the only mutual fund doing it.

Some 13 other domestic U.S. equity funds that manage more than $1 billion in assets have placed 10 percent or more of their portfolio in a single company, according to data from Thomson Reuters’ Lipper unit, with three of them holding above 15 percent. [Table below]

For some investment advisers, that is a worry.

“If you start to see something with more than 10 or 15 percent, then you start to question the very purpose of having that mutual fund,” said Tim Courtney, chief investment officer of Exencial Wealth Advisors of Oklahoma City, which has $1.4 billion under management.

Concentration is a hot topic in the industry since the souring of Sequoia’s bet on Valeant, a stock that accounted for 29 percent of its assets at the end of June.

Valeant shares have since dropped more than 60 percent, pulling Sequoia’s total return for 2015 to negative 8.9 percent as of Friday, trailing all peers, according to Morningstar.

The gamble on Valeant was extreme in an industry known for risk aversion, and by far the most concentrated bet among $1 billion-plus domestic funds. The only mutual fund with a higher allocation to its top security at mid-year was Nysa Fund, a tiny small-cap portfolio with 35 percent of assets in Ligand Pharmaceuticals Inc, according to Lipper.

The case for concentration is that a well-chosen stock can magnify a portfolio manager’s best ideas over time, and that blow-ups like Valeant are rare. But often the payoff on a concentrated bet depends on timing.

Take for instance the $3.4 billion Putnam Equity Spectrum Fund which was close to Sequoia in concentration with 20 percent of assets in satellite-TV provider Dish Network Corp as of Sept. 30. Dish had been a rising stock in 2014, but has slumped this year, helping drag the fund 8.78 percent into the negative, according to Morningstar.

Another concentrated fund is the well-known Fairholme Fund, which had almost half its assets in insurer American International Group at the end of last year. Manager Bruce Berkowitz since cut the AIG stake to 10 percent as of Sept 30, for reasons a spokesman declined to discuss.

Reporting by Ross Kerber; Editing by Richard Valdmanis and Alan Crosby

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