For These Funds, Being Concentrated Hasn't Equaled Success

Concentrated funds have won the hearts of many investors. If a manager has conviction in his top names, it only makes sense that those holdings should take up a substantial share of a portfolio.

And the well-publicized successes of concentrated funds like  Fairholme (FAIRX) serve to corroborate the notion that a compact portfolio is often a successful one.

However, concentration doesn't automatically equal success. Many notable managers have risen to the challenge, but some concentrated funds have delivered subpar returns, higher-than-average volatility, or both.

Using the  Premium Fund Screener, we sought concentrated funds that haven't managed to deliver an attractive risk/reward profile. First, we homed in on the distinct portfolios of domestic-stock funds with fewer than 40 holdings. Additionally, we screened for funds with above-average Morningstar Risk ratings, five- and 10-year trailing returns that trail at least half of their category peers, and Morningstar ratings of just 1 or 2 stars.

On the fees front, we allowed for funds with expenses greater than the category average as well as load funds. The screener yielded 23 funds. Premium Members can  click here to replicate this screen.

SunAmerica Focused Growth & Income 
This fund's management team invests in both growth and value companies that it believes will outperform the market with lower volatility relative to the S&P 500. But a look at the fund's Morningstar Risk rating--which has consistently been above average--and its lackluster return record indicates that the fund hasn't delivered on those goals. The fund has trailed the S&P 500 in six of the past 10 calendar years and has not cracked the top half of its peer group since 2006. Its hefty 1.57% price tag is none too appealing, either. Investors seeking a concentrated large-blend fund are likely to find a better fit elsewhere.

 TCW Concentrated Value 
In tightly concentrated portfolios like this one, a few missteps can readily translate into huge losses. This fund's showing in 2008, when a big bet on energy went awry, was a case in point. Long-time comanagers Tom McKissick and John Snider don't hesitate to build big sector stakes or load up on individual names when they believe the shares are trading below their estimates of fair value. Their contrarian style has paid off in some years, but the fund's highly erratic performance pattern makes it unsuitable for all but the most risk-tolerant investors with very long time horizons.