PORTFOLIO
he notes. At the other end of the size
spectrum, small-cap equities provide
too many choices. “It makes it more
difficult to separate the opportunities
from the dead ends,” he says.
BE WARE OF VOLA TILI TY
When managers limit their portfolios
to a few stocks, the result can be more
volatility. But, Morningstar’s McDe-
vitt argues, that doesn’t have to be
the case. He cites the Sequoia Fund
(SEQUX) and the Yacktman Fund
(YACKX) as examples. “There are a
lot of concentrated funds that tend to
be more long-term oriented,” he says.
“They’ll buy at value prices, but then
they’ll hold on for the long term.”
But highly concentrated funds can
and do stumble. How much leeway
formula to cite. “It’s more an art than
a science,” he explains.
PRO TECTING THE DOWNSIDE
A formula is very important to Rich
Winer of Winer Wealth Management
in Woodland Hills, Calif. He uses a
concentrated portfolio for equities,
picking the stocks himself using fundamental analysis. He then relies on a
technical analysis program to tell him
when to sell a position. “Protecting the
downside is always job one,” he says.
When Winer began his career as an
RIA, he subscribed to modern portfolio theory and advised clients to hold a
diversified portfolio. He tried different
strategies, including low volatility and
long-short portfolios. “It hedged out
the return,” he observes.
“The issue with most portfolios is that
they don’t have enough asset classes.”
Johnson also favors asset alloca-
tion strategies. “I’m more of an asset
allocator than a fund picker,” he says.
WHA T CLIENTS NOTICE
But whatever the investments selected,
concentrated or not, they probably
don’t register on the radar of most clients. Wander notes than many clients
don’t have the knowledge or interest to
engage in that conversation, or they just
prefer to delegate. Johnson agrees that
clients don’t notice if they are in concentrated equity portfolios. “I haven’t
had a single client bring it up,” he says.
What clients do notice is the performance of their overall holdings. And
von der Linde believes that is part of
You’d better understand in great detail how a fund manager makes
decisions because each holding is going to mean a lot more.
should advisors give these managers? When does it make sense to exit
the position?
“I tend not to be trigger happy,”
says Wander, who tries to under-
stand what’s behind a fund’s results.
“Is there a reasonable explanation for
why there is underperformance?”
For Blumberg, it comes down to
a question of process. If the manager
changes style, “that’s always a concern
to me,” he says.
Sometimes, planners simply ask
themselves an old question: Can you
sleep well at night owning this investment? Stan Johnson of Comprehensive Financial Planning in Durango,
Colo., once held the concentrated
Fairholme Fund (FAIRX) in client
portfolios. “I actually sold out of that ...
because I saw the big bet in financials
and wasn’t comfortable with that,” he
says. Johnson admits that he has no
Eventually, he found other advisors
using the technique he now employs.
Winer selects 24 stocks, equally divided among large-, mid- and small-cap
issues. The issues are diversified by
sector and industry. Most of the names
are U.S. equities, and although Winer
occasionally buys a foreign stock, he
holds no emerging market issues. He
manages risk by moving more into
cash when the computer program indicates it is prudent to do so.
He acknowledges he was whipsawed
during a short period of extreme market
volatility in 2011. “We’re back on track,”
Winer says. “It’s not going to be perfect
all the time, but the long-term results
have been fabulous.”
Winer’s technique isn’t likely to be
copied by a large majority of planners,
who use other methods to manage risk.
“At the asset-class level, I think that more
diversification is better,” Wander says.
the case for using concentrated equity
funds in client portfolios. He notes
that bonds don’t grow and an acre of
land can’t double in size. “Common
stocks are the only things you can invest in that grow,” he says.
But Blumberg notes that advisors
have to use some caution in selecting
nondiversified funds. “If you’re betting on a concentrated portfolio, you’d
better understand in great detail how
this person makes his decisions,” he
says, “because each holding is going to
mean a lot more.” FP
Joseph Lisanti, a Financial Planning
contributing writer in New York, is a
former editor-in-chief of Standard &
Poor’s weekly investment advisory
newsletter, The Outlook.
