Some members of the Morningstar 500 carry concentrated positions.
A version of this article was published in the July 2017 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.
Fund managers taking big bets have long captured investors’ attention, as the biggest short-term winners and losers are often the most daring. However, cautious investors should keep an eye out for funds with high levels of company-specific risk and make sure they are comfortable with them for long time horizons.
The largest individual stock holdings of current members of the Morningstar 500 were drawn from the funds’ first-quarter portfolios. Here are a few members of the Morningstar 500 that have outsize bets in individual names.
AMG Yacktman Focused YAFFX
This fund’s name says it all. Stephen Yacktman and Jason Subotky are no strangers to big, concentrated positions. They take their mandate literally, as shown by a 14.2% position in Samsung Electronics SSNGY participating preferred shares as of March 31, 2017. The only larger position in the portfolio was cash, another Yacktman staple, which chewed up 21.2% of the portfolio. Since then, the fund’s managers have taken some profit off the table by trimming nearly 2 percentage points off the position, but the bet still stands at 12.5% of fund assets as of June 30, 2017. The balance has gone to cash, which swelled to 23.4% of assets over the past three months. Investors here appreciate the cash cushion for downside protection should the managers’ view not play out, but they also expect Yacktman and Subotky to buy aggressively when the time comes.
Parnassus Endeavor PARWX
Jerome Dodson has doubled down on Gilead Sciences GILD. As of June 30, 2017, Gilead was the top holding of Parnassus Endeavor, Dodson’s solo-managed fund. The stock represents 12.0% of the portfolio’s assets. In fact, the entire Parnassus crew has doubled down on the company. Gilead is also the top holding of the Parnassus FundPARNX and the second-largest holding of Parnassus Core Equity PRBLX, though at stakes below 5% of assets. Back in March 2016, Dodson said he thought Gilead was at the bottom when it traded just under $70 per share, but he warned that it could also dip lower into the mid-60’s range. Almost per script, Gilead dipped and the veteran stock-picker demonstrated conviction in his idea by buying on the weakness. Dodson, who rarely deposits more than 5% of assets in a single name, has increased the stock’s allocated capital since that March 2016 interview by 5 percentage points. Over that time, the stock has rebounded to trade in the mid-70s—good news for fund shareholders. Dodson and others have a high level of respect for Gilead’s management team, and they believe they will deploy Gilead’s cash stockpile in a sensible manner. Dodson has been right more often than not, so there is reason for cautious optimism.
Matthews China MCHFX
If you invest $100 in this fund, $11 will go to Tencent Holdings TCEHY. As of March 31, 2017, this fund’s managers allocated nearly 11% of the fund’s assets to this roughly labeled “Internet company,” which is a sizable bet, but not in the way one would expect. The fund actually has an underweighting in the security, which represents over 15% of the fund’s benchmark portfolio, the MSCI China Index. Through the lens of active risk, managers are deviating even more with respect to Alibaba BABA, which also has an underweighting to the benchmark by nearly 6 percentage points. This fund, despite the concentrated positions, is more diversified than the benchmark through the narrow lens of percentage of assets in the top 10 holdings (48.7% versus 52.7%, respectively). Of course, this fund isn’t meant to be a big position in an investor’s portfolio, so if it’s 3% of yours, then the 11% bet doesn’t seem so risky.
T. Rowe Price Global Technology PRGTX
This fund is no stranger to concentration, but what it doesn’t own is notable. The fund did not own any shares of Apple AAPL, the popular technology giant, as of June 30, 2017. Of the equity-focused Morningstar 500 funds, nearly 10% owned Apple as the single-largest equity holding. This fund’s lead manager, Joshua Spencer, has instead placed a massive amount of confidence in Salesforce.com CRM. Spencer built this position from nothing, as of year-end 2015, to 12.3% of portfolio assets, where it sat as of March 31, 2017. Spencer has further boosted the position by adding more than 2 million shares in the second quarter of 2017. The fund’s position accounted for 14.3% of portfolio assets as of June 30, 2017.
It’s no surprise Fairholme makes this list. Combine a process that historically has been quite focused with a portfolio that has bled more than $15 billion since March 2011 and you end up with ultraconcentrated positions. The fund has huge stakes in Fannie and Freddie preferreds. In addition, it has a big bet on the equity of The St. Joe Co. JOE. The Florida-based real estate developer and manager may not be a household name with a market cap just over $1 billion, but those familiar with the company know Bruce Berkowitz—this fund’s lead manager—is the independent chairman of the board of directors. This fund owned more than 30% of St. Joe’s outstanding shares as of Feb. 28, 2017, taking up 14.1% of the fund’s assets. The fund’s shareholders own the equivalent of more than 100 days’ worth of the stock’s average daily trading volume.