Morningstar's Favorite Concentrated Equity Funds

In light of its recent troubles--especially the fact that the fund could be run in a slightly different fashion than in the past--Morningstar's analysts recently downgraded the fund from Gold to Bronze. The fund has hung on to a Medalist rating, however, signaling that Morningstar has not lost faith in Sequoia. Morningstar's analysts also believe that certain concentrated funds have the potential to outperform. Indeed, a recent screen of domestic-equity funds identified 14 medalist funds that pack at least 50% of assets into their top 10 holdings; eight of those offerings pack 60% or more into their top 10 positions. Some of these--such as

Here's a closer look at three of the lesser-known concentrated funds that our analysts recommend. Premium users can click

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Akre Focus

AKREX

Category: Mid-Growth

Analyst Rating: Silver

% of Holdings in Top 10 Holdings: 68%

Morningstar analyst Alec Lucas describes this fund's managers as "picky and benchmark-agnostic." As long as companies meet their criteria--sustainable competitive advantages, high free cash flow, strong management, and the ability to reinvest cash at superior rates of return--they'll back up the truck for them. The portfolio can also carry significant sector risk: Right now, for example, management is overweighting the financials sector and, to a lesser extent, industrials. Despite a lumpy-looking portfolio, returns have been anything but, landing in or near the mid-growth category's top quartile in every calendar year since 2011. That said, the fund's highly focused portfolio is bound to encounter a rough patch at some point; investors will have a better experience with the fund if they go in with their eyes wide open to that possibility.

Hennessy Focus

HFCSX

Category: Mid-Growth

Analyst Rating: Bronze

% of Holdings in Top 10 Holdings: 62%

Like the Akre offering, Hennessy Focus is a concentrated mid-growth fund whose managers pay attention to valuations. They seek companies with sustainable competitive advantages, look for management teams that are effective capital allocators (also like Akre), and aim to buy them when they look relatively cheap. If too few companies clear those hurdles, management is content to sit in cash. (Cash recently weighed in at 16% of assets.) Analyst Alec Lucas notes that management aims to counterbalance company-specific risk by avoiding multiple companies within the same industry, but that's more of a guideline than a hard-and-fast rule. As one would expect of such an idiosyncratic portfolio, performance has been quite unlike that of basic benchmarks such as the S&P 500, but it has been excellent. As with the Akre fund, however, investors should be prepared to hang on through periods of performance weakness.

RiverPark/Wedgewood

RWGFX

Category: Large Growth

Analyst Rating: Silver

% of Holdings in Top 10: 65%

Although it has regained (relative) ground so far this year, this fund’s 2015 results demonstrate the occasional performance dips that can accompany highly concentrated funds. Dan Culloton, Morningstar's associate director for active strategies, notes that 17 of 24 holdings detracted from performance last year. Yet he still has faith in the fund’s process, which emphasizes companies that can grow quickly and profitably and are trading at reasonable valuations. He notes that nearly all of the portfolio holdings earn narrow or wide moat ratings from Morningstar’s analyst team, while the portfolio’s valuation metrics are below those of the Russell 1000 Growth Index.