Financial Planning - January 2013

portfolio

Concentrated
Effort
Having a lot of stocks in a portfolio
reduces risk, but holding a limited
number of positions can produce
home runs. By Joseph Lisanti

Advisors know that diversifi- cation should limit risk, but holding too many positions can dilute the benefit from having picked a big winner. In fact, many actively managed equity funds hold so many stocks that they become “index huggers,” and simply mimic the performance of their benchmarks — at a higher cost to investors.

The answer for some planners is to use concentrated portfolios for some equity positions. Exactly what constitutes a concentrated portfolio is open to question. Some people would consider a fund holding 50 or fewer stocks concentrated. Certainly, a stock fund with fewer than 30 issues would qualify. According to Morningstar, 350 equity portfolios in its database recently held fewer than 30 stocks.

How well these non-diversified funds do depends on the skill of the manager or managers. Morningstar analyst Kevin McDevitt sees concentrated funds as a powerful tool in the right hands. “In the wrong hands, they can be an absolute disaster,” he says.

Roy M. Blumberg, director of client portfolio management at the Philadelphia Group, keeps a majority of the firm’s clients’ equity assets in index ETFs, citing lower costs and the reality that “most managers don’t outperform the benchmarks over time.” Even so, Blumberg does occasionally use a fund that holds a limited number of positions “if we truly believe that what the concentrated portfolio is focused on will help us reach our goals and objectives.”

TACTICAL APPROACH

He cites the firm’s recent use of a concentrated portfolio of master limited partnerships that met dividend and cash flow goals and contributed to total return. But Blumberg sees concentrated portfolios as tactical rather than strategic. He holds such positions as long as they remain attractive, but will not make any one of them a permanent part of the mix. “I describe myself as a long-term renter,” he says.

Robert Wander, a planner at New
York-based Wander Financial Ser-
vices, agrees with Blumberg on index-
ing in at least one equity category. “In
the U.S. large-cap equity space, for
example, generally speaking I would
be more oriented toward an index ap-
proach,” he says.