Sometimes it's easy to determine when a fad has gotten out of hand. I had one such revelation several months ago, when on a drive through rural Illinois I noticed a convenience store that had added cappuccino to such longstanding offerings as pizza, gasoline and live bait. I'm now getting the same feeling about the focused-fund fad. True, these funds do have some appeal. For those who own several stock funds, it's not terribly important that each one be diversified. There's also something to be said for letting a talented manager make big bets that might produce enormous payoffs. Still, it's hard to see the need for some recently launched focused funds, including even the legendary Roy Papp's. Papp was already running three funds that contain an average of only 26 stocks. One has just 22. I wonder what the marketing pitch for his 'focused' fund will be, "Turned off by our index-like, unwieldy, 22-stock portfolio? Questioning whether Roy Papp's 22nd idea as good as his 16th?" All kidding aside, Papp at least has a great long-term record, something many of his focused-fund rivals sorely lack.
Papp's contribution to the fund industry doesn't end with great returns; he's also one of the best storytellers in the business. He has some interesting advice for pundits who claim that low dividend yields foreshadow a deep correction. Papp relates that soon after he entered the investment business in the 1950s, stocks' average yields fell below those of medium-term bonds. Papp says many grizzled investment professionals argued for a move out of stocks on the grounds that such low dividend yields were unsustainable. Of course, the market has mostly gone higher--and yields have gone much lower--during the subsequent 40 years. That's something to think about the next time you hear a talking head say that a bear market is imminent.