Fund of funds managers are concentrating portfolios on concerns over reduced returns
Fund of funds managers are responding to tough market conditions by having fewer underlying holdings.
This concentration in multi-manager portfolios is being matched by them looking to buy into vehicles that have concentrated stock lists, such as high alpha and focus funds.
Aidan Kearney, who runs the Artemis Premier Funds Service, said managers who over-diversify risk diluting returns.
He said: 'Some multi-managers have a broad holding across funds with about 4% to 5% allocated to each. I take a more concentrated view. In Artemis' Equity Income Fund there are seven holdings and in UK Growth Fund there are around eight, which presently I feel is a little top heavy.'
The Artemis multi-manager UK Growth Fund has 16% exposure to Gartmore's UK Focus Fund and 17% in the Schroder UK Alpha Fund.
Kearney said: 'I would describe these funds as rotational as they are not necessarily seeking to buy and hold but are constantly rotating into stocks and sectors they consider profitable.' One result of this trend to more concentrated portfolios is that investors could be getting high exposure to individual equities.
Within the Artemis UK Growth Fund the JO Hambro UK Growth Fund has 7.44% exposure to GlaxoSmithKline, Gartmore UK Focus has 7.5% exposure and Schroder UK Alpha has 4.6%, a combined exposure of 19.54%.
The stock, which makes up 7.74% of the FTSE 100, has fallen 9.25% in sterling terms over the 12 months to the end of May.
At Isis the number of funds held in its multi-manager portfolios has declined from around 30 to closer to 20 in the last two years.
Richard Philbin, who runs the funds of funds team at the group, said portfolio risk can be very stock specific. This is one reason he prefers more concentrated portfolios.
'Some managers have 200 stocks in a fund and others will have only 40. A manager looking at 40 stocks can keep an easier watch on their portfolio than a manager invested in 200,' he said.
Manager of Edinburgh Portfolio's funds of funds, Mark Harris, however, believes a less concentrated portfolio leads to less risk.
He looks to increase the concentration levels in his portfolios at times when he feels it is worth taking on more market risk.
Credit Suisse Asset Management has three global funds of funds each with between 18 and 26 holdings.
Fund manager Robert Burdett, said this level of concentration has historically remained consistent.
He added: 'We also have eight fund of funds which are regional in focus and they have between seven and 10 holdings each and like our global funds have been constant in their diversification.'
One reason funds of funds can be very concentrated is that the maximum exposure they can have to an individual fund is 20%.
Philbin prefers to keep his maximum exposure closer to the 10% mark. However, Burdett at Credit Suisse takes a different view.
He said Credit Suisse has close to 20% in some regional portfolio funds but added even if market conditions were very good he would still hold his current levels of concentration.
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