Get focused, get profits
NEW YORK — The way to greatness, says mutual-fund manager William Nygren, is to think small.
As in "very few." As in 15 companies in the portfolio for his Oakmark Select Fund.
Having just a few companies to watch lets a portfolio manager give "concentrated attention" to a fund, says Mr. Nygren.
And while his fund has underperformed the broader stock market this year (with a 6 percent gain compared with about 20 percent for the S&P 500), it has significantly outperformed the market since its inception in 1996. It's ahead an average 35 percent a year.
Unlike many fund managers, Nygren has no interest in diversification, an approach often used to reduce risk. Fund managers frequently buy stock in 100 to 150 companies with the idea that when some are down, others will be up.
But Nygren belongs to the world of "focus funds," a relatively new concept in mutual-fund offerings but one becoming increasingly popular.
These managers focus on just a few companies, ideas they really believe in, and try to avoid spreading themselves too thin.
Focus funds generally hold between 30 and 50 companies, and usually the top 10 holdings represent 50 percent or more of the fund's assets. Individual companies are generally selected on the strength of their fundamentals, not because they fit a particular theme.
Oakmark Select, for example, invests more than 66 percent of its money in 10 companies, from cable TV to Gucci.
Well-known focus funds include Janus 20, Clipper Fund, Yachtman Focused, and Vanguard Selected Value.
By contrast, the average diversified US equity fund, according to Morningstar Inc., has a portfolio of 129 companies. The average small-cap fund has 164 companies.
There are 522 diversified equity funds with portfolios of 50 or fewer companies, Morningstar says; 154 funds with 30 or fewer.
Longtime mutual-fund expert Sheldon Jacobs likes focus funds especially when valuation levels run high for the stocks of large companies.
He also favors them when uncertainty governs the day-to-day direction of the market. Focus funds tend to do well, he says, in a stock-picker's market, one that favors companies that perform well even when the overall market does not.
Not all focus funds outshine the rest, Mr. Jacobs is quick to note, but some can do very well.
Last year, for example, many focus funds beat the 24.49 percent return for the average diversified stock fund, Jacobs found in an analysis of the group. Focus funds can also outperform their more-diversified fund rivals during market downturns.
When buying shares in a focus fund, do your homework. Look for a fund with a first-rate manager, and check the track record over the life of the fund, not just the year to date.
"You do have to be aware of lots of details with a focus fund, such as exactly which companies a fund carries in its portfolio," says Scott Cooley, who covers several focus funds for Morningstar.
Owning four or five focus funds can let you cover most major fund categories, such as growth (seeking high annual gains), value (seeking underpriced companies,) and large, mid, and small-company stocks, Mr. Cooley says.
Make certain that your companies do not overlap, says Cooley. You also have to be careful of any one large holding in a fund that may tilt the performance of the fund downward.
American Heritage Fund, for example, considered both an aggressive-growth fund with a small portfolio and a focus fund, has tended to lurch between euphoria and catastrophe because it relies so heavily on one or two key companies.
Several focus funds have outperformed the S&P 500's 20.7 percent return so far this year. These funds focus on 50 or fewer stocks, letting managers pay greater attention to each stock than managers of other larger mutual funds can. Below are returns of some more-popular focus funds.
Fund name (number of stocks) YTD 1-yr.
Berger Select Fund (20-30) 60.1% 45.0%
Janus 20 (20-30) 48.7 19.2
Legg Mason Value Fund (46) 31.0 20.2
Papp Focus Fund (16) 22.1 22.1
Clipper Fund (29) 20.5 24.8
Oakmark Select Fund (15) 6.0 35.0
Source: Companies above N/A: not available