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Focus on These High-Concentration Funds

With the right manager picking the right stocks, funds with fewer holdings can be winners.

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You're probably used to hearing about the importance of diversification in your portfolio. "Hold too much in a given stock or sector, and you're asking for trouble if that stock or sector tanks," you've been told time and time again. 

Yet that's just what some of the better actively managed funds do (along with some that are not so good). They put together highly targeted portfolios aimed at capitalizing on strong individual performances of a handful of stocks as opposed to casting a wide net and riding the market higher or lower. Although such concentrated funds might not make good core holdings for nervous investors because of their frequently above-average volatility, they can still serve as strong supporting players in a well-diversified portfolio. One common characteristic of concentrated funds can also be an advantage: They typically do not mirror the broader market, allowing fund managers to outperform by overweighting stocks or sectors they like.

Adam Zoll does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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