Concentrated Stock Funds: Winners and Losers in 2023′s Market Rally

The first half of 2023 saw possibly the most concentrated stock market rally in history. For many fund managers, that proved a difficult challenge. But for a few funds with big stakes in the right stocks, it’s been a recipe for big returns. At the same time, other highly focused funds that bet on the wrong horses have struggled as their largest investments lagged.

This year offers investors a lesson on the risks and rewards of concentrated funds. While a concentrated portfolio can provide outsized gains when a manager’s high-conviction purchases prove astute, it also doesn’t take much for them to severely underperform when any of their major holdings struggle.

The handful of technology and communication services stocks that have powered the U.S. stock market to solid gains this year includes Nvidia NVDA, Meta META, and Tesla TSLA, which all advanced more than 100% in the first half. As a result, growth stock funds have tended to benefit. On average, the top 10 holdings of a large-growth fund make up nearly half its portfolio, compared to 30% for the average large-value fund and 29% for the average U.S. stock fund.

Large-growth funds often hold bigger stakes in a smaller number of companies because of the composition of the market indexes that these funds either track or strive to beat. For example, the top 10 holdings in the $423.6 billion SPDR S&P 500 ETF SPY make up 30% of the fund, and $204.2 billion Invesco QQQ’s QQQ top 10 holdings make up almost 60% of the fund.

“The composition of growth benchmarks is so much greater than the rest of the universe, and active managers often feel compelled to be concentrated,” says Morningstar strategist Robby Greengold.

Which Concentrated Funds Have Outperformed?

To see which funds have benefited the most from this unusual rally, we screened for funds with more than $100 million in assets under management and sorted by the percentage of assets in their top 10 holdings. These are the most concentrated U.S. growth funds.

By almost any definition, $6.9 billion Baron Partners BPTIX is the most concentrated fund. Its top 10 holdings all but make up the entire fund. Top holding Tesla comprises 42% of the portfolio; the electric car company is up more than 108% this year.

The fund is up 42.6% so far this year and beating out nearly all growth funds. However, last year the fund’s large stake in Tesla dragged on its performance, and it ended the year down 42.4% “The fate of the fund is tied to the stock,” writes Morningstar senior analyst Adam Sabban. “Lead manager Ron Baron allowed Tesla to appreciate well beyond the levels typically seen in an open-end mutual fund.”

Tesla has powered another well-known fund, the $8.4 billion ARK Innovation ETF ARKK, making up 12% of it. Coinbase COIN and Roku ROKU are other top holdings. After losing 67% in 2022, the fund has bounced back and beaten most of its peers in 2023. It is up 41.3%. Morningstar downgraded the fund’s rating to Negative in March 2022, in part due to its stock-specific risk. “High exposure to money-losing companies amplifies the strategy’s volatility and downside risk,” writes Greengold.

Which Concentrated Funds Have Lagged?

While some funds have been lifted by high-flying stocks, others haven’t benefited from their concentrated portfolios.

Akre Focus Supra’s AKRSX top 10 holdings make up more than 80% of the fund, though no individual holding makes up more than 15%. The $12.9 billion fund’s top holding is Mastercard MA, which is up only 9.7% this year compared with the broader market’s 20.0% gain. Other financial holdings have dragged on the fund, including Moody’s Corporation MCO and Visa V. The fund has struggled to beat its peers this year. It’s up 15.1%, while the average large-growth fund in the category is up 23.0%. “A compact portfolio (18 holdings recently) and a willingness to take double-digit positions in top ideas elicit stock-specific risks,” writes director Katie Reichart.

Most Concentrated U.S. Equity Funds

Similarly, both $1 billion Virtus Silvant Focused Growth AFGFX and $1.1 billion AB Concentrated Growth WPSZX count Microsoft MSFT, which is up 40.3% this year, as their largest holding. However, the funds have had disparate results this year. Virtus Silvant is up nearly 40.0% and ranks in the 5th percentile of large-growth funds. Its top 10 holdings also include market leaders such as Apple, Nvidia, and Amazon. AB Concentrated is up 10.5% and ranks in the 94th percentile. Its other top holdings include Mastercard, industrials company Eaton Corp ETN, and real estate company American Tower AMT.

Most real estate and financial stocks haven’t performed as well as the technology and communication service sectors this year. The Morningstar US Financial Services Index is up only 1.5% year to date.

Middling returns on financial stocks bogged down $7.8 billion Baron Growth BGRIX, another highly concentrated fund. MSCI MSCI is the fund’s top holding, and financial firms make up 40% of the fund. These include Arch Capital Group ACGL and FactSet Research Systems FDS, which are both among the fund’s top 10 holdings. The fund is up only 11% this year and ranks in the 77th percentile of mid-cap growth funds.

The fund’s concentration is due in part to the manager’s decision to let winning stocks grow, Sabban says. “The top five positions in the fund, headlined by MSCI at 10% of assets, were all purchased prior to 2010,” he writes. “Their rising weightings are mostly a product of appreciation, as Baron won’t add to stocks representing more than 5% of assets.”