Watch Out for Risks in These Funds With Stealthy Industry Bets

Wise investors know that their funds’ sector weightings matter. Morningstar recognizes 11 equity sectors, including technology, healthcare, and industrials. But each sector comprises various industries, and investors should understand just how much industry risk is also in their funds’ portfolios.

Interest in artificial intelligence, for example, has made Nvidia NVDA and other stocks from the semiconductor industry popular. In early 2025, about one in six equity funds in the Morningstar 500 had at least 10% of assets in semiconductor stocks. Many suffered in January when news about DeepSeek, a Chinese artificial intelligence tool that supposedly was relatively inexpensive to develop, raised doubts about future chip spending. What other industry risks lurk in funds covered by Morningstar analysts?

It might be hard to believe, but even a 300-stock portfolio can have significant industry risk—let alone single-stock risk. That’s the case at Fidelity Contrafund FCNTX, which has a Morningstar Medalist Rating of Silver. Manager Will Danoff had stashed nearly 22% of fund assets in the internet content and information industry as of February 2025. Most of that—17.4%—was in Meta Platforms META alone. Danoff has grounds for confidence in Meta: He has invested with the company (formerly Facebook) since before its May 2012 initial public offering. The stock has powered Fidelity Contrafund to impressive results lately—but a change in Meta’s fortunes could hammer the fund. Danoff hasn’t built such a large single position in at least 25 years.

Biotechnology investing is often risky but sometimes rewarding. That’s especially true in small-cap biotechs, where Josh Spencer, the manager of Silver-rated T. Rowe Price New Horizons PRNHX, likes to fish. Of his fund’s 20% biotech stake in March 2025, Spencer’s biggest positions were in companies with established businesses and sizable revenues, such as Argenx ARGX and Bio-Techne TECH. In fact, Argenx was a top contributor to the fund in the 15 months through March 2025. Rising interest rates have hit many biotechs hard, however, and Spencer’s big weighting to that industry in recent years has come at the expense of allocations to better-performing areas.

Funds with relatively few holdings, such as Neutral-rated Akre Focus AKREX, inherently carry significant sector and industry risks. Manager John Neff has favored financials stocks for years, making the fund an outlier in its tech-heavy large-growth Morningstar Category. The portfolio’s allocations to the credit services and asset-management industries—roughly 20% each in January 2025—were the category’s highest. What’s more, those tallies came from just two holdings apiece: Mastercard MA and Visa V for credit services and KKR & Co. KKR and Brookfield BN in asset management. Those picks have done well for the fund since the start of 2024 but weren’t enough to outpace the Nvidia-powered Russell 1000 Growth Index through March 2025.

Apart from sector-focused funds, few have a higher equity industry concentration than Gold-rated Brown Capital Management Small Company BCSIX. In December 2024, it had more than 54% of its assets in one industry: software applications. For their part, the fund’s managers try to diversify using their own six-sector classification system in which no sector may get more than one third of the assets. But there’s no denying there are a lot of software-oriented companies in their portfolio. That’s familiar territory for Brown Capital’s managers. Two software-application companies have been in this portfolio for almost two decades or longer: Tyler Technologies TYL and Manhattan Associates MANH. They’re behind the fund’s solid record dating to 1992. But even more than T. Rowe Price New Horizons, having so much in one industry has siphoned this fund’s assets away from hotter segments of the small-cap equity market in recent years, contributing to relatively weak performance in its small-growth category and a spate of heavy outflows.

This article first appeared in the April 2025 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.