analysis and strategies
Concentrated funds have outperformed their non-concentrated counterparts by almost 1% over the past decade, according to a Standard & Poor's (S&P) study.
For almost all style categories (the two exceptions were the mid-cap value and mid-cap growth categories), the average 10-year annualised return as of 31 March 2003 for concentrated funds was 9.29%, just under a percentage point greater than that of non-concentrated funds, which was 8.31%.
'The average absolute return and Sharpe Ratio of concentrated funds do show that these types of funds provide better return relative to the risk they incur than their diversified counterparts,' said Phil Edwards, managing director of funds research at S&P.
However, he warned concentrated funds, by nature of their composition, are volatile.
'While the absolute returns of these funds are, on average, almost a full percentage point better than funds that are diversified, the spread narrows on a risk-adjusted basis.'
Conducted by S&P web service, Fund Advisor, the study focused on mutual funds having at least $50m in net assets, at least 10 years' operating history, and management tenure of more than five years (as of 31 March 2003).
These criteria yielded a total of 397 domestic mutual funds. To further narrow the list to exclusively concentrated portfolios, the study sought out funds where the top 10 holdings accounted for at least 30% of the fund's total assets ' resulting in 140 funds spread out over all nine investment style categories.
Some of the concentrated funds determined by S&P to have strong absolute and risk adjust returns over the past 10 years include: Clipper Fund (CFIMX), Torray Fund (TORYX), Smith Barney Aggressive Growth Fund/Z, Heritage Capital Appreciation Trust/A (HRCPX), First Eagle Fund of America/Y (FEAFX), Ariel Fund (ARGFX), and Wasatch Funds Small Cap Growth Fund (WAAEX).
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