by Cherry Reynard from interactive investor, 15th July 2024:
Running a concentrated portfolio of a small number of companies comes with the risk of a single-stock failure, which can derail a fund manager’s track record..
The vogue has been for managers to hold concentrated portfolios. Many have sought to emulate the Warren Buffett mantra – “keep all your eggs in one basket, but watch that basket closely.”..
However, there are alternative approaches. The £5.9 billion F&C Investment Trust, for example, has more than 400 holdings. While this may seem like a lot, it is less than one-tenth of the holdings in its benchmark, the FTSE All World index.
Those in favour of a concentrated portfolio will argue that a smaller portfolio shows conviction and focus..
James Carthew, head of investment company research at QuotedData, compares two extremes – Manchester & London and Herald investment trust. Both have a strong focus on technology, but the first trust operates with a very focused portfolio with over half of the portfolio in two stocks. Carthew says: “Mark Sheppard, the manager is passionate about artificial intelligence (AI) and the transformation that it will wreak on the global economy. The two mega-cap leading positions – NVIDIA and Microsoft – he sees as the main beneficiaries of this.”
In contrast, Herald invests in small and medium-sized companies, which can be more volatile. Their businesses are less broadly based and sometimes exposed to binary outcomes where success or failure can be hard to predict. At the end of April, manager Katie Potts was invested across 326 companies. Carthew says: “The winners can multiply in value and grow to be reasonably sizeable positions – the largest, Super Micro Computer, was 4.3% of the portfolio at end April. The losers can go bust without making much of a dent in shareholders’ capital”.
He believes both approaches have a place.
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