by Jennifer Hill from interactive investor, 3rd October 2023:
As the old adage goes, one must concentrate to build wealth and then diversify to protect wealth. However, the benefits of diversification can diminish rapidly after you reach around 30 stocks.
This concept can be traced back to a paper published by Lawrence Fisher and James Lorie in 1970, which showed that 95% of the benefit of diversification could be captured by a randomly created portfolio of 32 stocks…
The main advantage of a concentrated portfolio is its potential to generate outperformance. The flipside of this is the prospect of elevated volatility and steeper drawdowns…
A concentrated portfolio has fewer positions from which to draw liquidity if required – something that investment trusts with their permanent pool of capital need not worry about…
It comes as little surprise, therefore, that when asked to name their favourite punchy portfolios professional investors suggested twice as many trusts than funds…
European Opportunities Trust
QuotedData and Shore Financial Planning both like European Opportunities Trust with its portfolio of around 30 European “special” companies.
“These are niche winners in their respective fields that can flourish in a range of economic scenarios,” says QuotedData senior analyst Matthew Read.
AVI Japan Opportunity
On to Japan now, and QuotedData favours AVI Japan Opportunity, which typically owns 25 to 30 quality Japanese small-caps.
Read says: “As is common in Japan, these will have a large portion of their market capitalisation in cash, listed securities or other realisable assets. The manager engages proactively with these companies, aiming to unlock the significant value tied up in them, assisted by a strong trend of improving corporate governance in Japan.”
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