11 Great Concentrated Funds
Skilled focused-fund managers get the most out of their holdings.
Fund Spy
When you're building your portfolio, one of your top goals should be diversification. You want to diversify into different markets, such as U.S. stocks, U.S. bonds, and foreign stocks. You also want to diversify along sector lines and into a fair number of holdings, so problems in one industry or stock won't delay your retirement or lead you to tell your children to cross a favorite college off their list because it's too pricey.
But once you've achieved that level of diversification, it's not a bad idea to put a piece of your portfolio in a concentrated fund. If you find great managers, in fact, you probably want them to run concentrated portfolios, so they get the most out of their holdings. Some of these managers also run low-turnover strategies, which enable them to get to know company management much better than the competition. For example, managers such as Chris Davis and Ken Feinberg of Selected American (see below) will spend months and even years getting to know a firm's management before buying in.
To jump-start your search for a concentrated offering, I've crafted a list of 11 great candidates. (Why that number? Because I've always wanted to go to 11.) In this case, I've defined concentrated as funds that have more than 40% of assets crammed into their top 10 holdings. Other people have defined the group by total number of holdings. You may be surprised to see a couple of funds on this list that have a lot of assets in their top 10 holdings, but have well over 50 holdings in all, as the tail end of their portfolios is a little more diverse. I've also limited the list to domestic-stock funds that are still open to new investors, so before you write me to ask why I left out Sequoia (SEQUX) and Oakmark Select (OAKLX), rest assured they remain among the best on the planet.
- Marsico Focus (MFOCX)
Running a concentrated growth fund is a tricky business, but Tom Marsico has mastered it. The trick is to have adequate sector diversification and to avoid having a portfolio full of momentum stocks that will all get taken out and shot on the same day the market gets squeamish about valuations. So in this fund, you get dull stuff such as SLM (Sallie Mae) (SLM) and UnitedHealth Group (UNH) sitting alongside extra-spicy stocks such as Genentech and Cisco Systems (CSCO). For those of you who think that being named Manager of the Year is a jinx, take note that Marsico won this honor way back in 1989. (If you buy through a broker, you can purchase Nations Marsico Focused Equity (NFEAX), which is pretty much the same thing.)
- ICAP Select Equity
With an expense ratio of just 0.80%, this has to be the best bargain on the list. ICAP takes a disciplined approach, blending valuation criteria with a search for fundamental catalysts to come up with a portfolio of just 20 to 30 names. This relative-value fund has been a standout for five years running, and sibling ICAP Equity has put up solid returns for nine years.
- Fidelity Dividend Growth (FDGFX)
This is one of those concentrated funds with big tails I was referring to. Manager Charles Mangum packs a lot in his top holdings, with 7% in Cardinal Health (CAH) and 6% in Clear Channel Communications (CCU), but the fund soon flattens out with 112 names total. Mangum uses a contrarian growth style and likes companies with strong growth potential but modest valuations. In order to get that combination, though, he often has to buy when controversy is swirling around a stock or when it's simply in a cyclical trough. The fund tends to lag the S&P 500 when momentum stocks rule the day, but it does well in value-driven markets or markets without a strong bias in either direction.
- Clipper (CFIMX)
You had to know this one was coming. Management has built a great record dating back to 1984 by looking for good companies at dirt-cheap prices. This is one of the stingiest funds on the list. The managers want stocks trading at a discount of at least 30% to their estimates of fair value. As a result, they have to buy even more controversial names than Mangum does. They buy the sort of companies that less-secure managers are quickly moving off their portfolios for fear of being fired. They've earned nice returns with the likes of Tyco International and Altria Group (MO) (formerly known as Philip Morris), although they do have some less dicey stocks such as Fannie Mae (FNM). The fund is way behind the S&P 500 this year, which means it's probably a decent time to buy.
- Torray (TORYX)
Doug Eby and Robert Torray buy reasonably priced companies with sustainable competitive advantages. Then they hold on for a long time. Over time, that simple approach has enabled them to run circles around the competition and the S&P 500. They tend to favor financials as well as health-care and media companies with strong cash flows.
- Selected American (SLASX)
Speaking of funds that love financials, this one has more than half its portfolio in the sector. It has 8% in American Express (AXP), 6% in American International Group (AIG), and 5% in Berkshire Hathaway (BRK.A). As I mentioned above, considering company management is a crucial part of the process. The financials have to be there, too. Davis, Feinberg, and the fund's analysts love to kick back with a company's financials and look for something the market has missed. Over time, they've done quite a job. (They run a similar fund in load format called Davis NY Venture (NYVTX).)
- Smith Barney Aggressive Growth (SHRAX)
Richie Freeman is another manager who has figured out how to run a concentrated growth fund. Like Marsico, he blends steady growers with higher-risk fast-growth stocks. He parts ways with Marsico when it comes to turnover, however. He tends to hold on through thick and thin with a turnover rate in the single digits. In fact, the fund generally buys only mid-cap stocks, but it's in the large-growth category because Freeman lets his winners ride.
- Weitz Value (WVALX)
Manager Wally Weitz wants companies that look quite cheap relative to the cash flow they throw off. If he can't find many, he'll let cash build. It made up about 15% of the portfolio at last check. As a result, you get lots of media like Liberty Media (L) and financials like Berkshire Hathaway. (Yes, there's a Berkshire theme running through this list of great focused managers.) Occasionally Weitz's cheapness will lead him into a mess like Adelphia Communications , but the record shows those are few and far between. (By the way, Barron's ran an interesting interview with Weitz last week.)
- Longleaf Partners (LLPFX)
This one was kind of predictable, too. Longleaf runs a very concentrated portfolio of just 20 to 25 names. The managers are very picky about what they'll buy--only companies trading at a 40% discount to Longleaf's estimate of their fair value make it in. That focus makes for a bumpy ride, but Longleaf has done a great job of protecting against long-term losses while still delivering an attractive upside.
- FPA Capital
I know I just wrote about Bob Rodriguez's bond fund, FPA New Income (FPNIX), but it's hard to leave FPA Capital off the list. Like his fellow Los Angelenos at Clipper, Rodriguez is one tight-fisted individual. He looks for companies trading at very low valuations, yet he insists on healthy balance sheets, good cash flow, and dominant market shares. Rodriguez invests in a mix of small- and mid-cap stocks, probably because that's where the cheapest companies are.
- Legg Mason Value (LMVTX)
Although you might think that obsessing about the S&P 500 would make this fund a conformist, manager Bill Miller is anything but. The reason is that he thinks and invests unlike anyone else. In a speech at our Investment Conference in June, Miller applied a wide range of thought to money management. He talked about the implications of the baseball book Moneyball by Michael Lewis as well as the musings of philosopher William James. He claims to be a Ben Graham fan, yet he invests a little bit differently than most Graham disciples. A key difference is that Miller looks out a long way to a company's potential future value and then applies a value discipline to its price today. As a result, you get highfliers such as Amazon.com (AMZN) rubbing elbows with deep-value stocks such as Waste Management and Tyco. Miller knows that the surest way to lose to the index is to invest like everyone else.
A version of this article appeared Aug. 25, 2003.