Powers of concentration: A third of equity investment company sector has less than 50 portfolio holdings

Research from the Association of Investment Companies (AIC), looking at investment companies in the equity sectors only, suggests that a third (33%) have 50 or fewer companies in their portfolio (57 out of 174 companies). 

Interestingly, the sectors with the highest proportion of investment companies with concentrated portfolios were in the most retail focussed investment company sectors, such as UK Equity Income, where over two fifths (10 out of 24 AIC members) had concentrated portfolios of under 50 holdings.  The Global sector also had a high proportion of investment companies with under 50 holdings – two fifths (9 out of 23 AIC members). 

Annabel Brodie-Smith, Communications Director, Association of Investment Companies (AIC) said: “It’s interesting that a third of equity investment companies have a concentrated portfolio. Clearly, these managers are taking high conviction decisions on their portfolios. However, the investment company sector has always offered a wide variety of choice for investors.  Some investors will be looking for investment companies with a higher number of holdings, arguing that it gives them a more diversified portfolio. When it comes to performance there’s no hard and fast rules on which is better, and it very much comes down to manager style and what investors want.” 

Manager comments

Nick Train, Manager, Finsbury Growth & Income and Lindsell Train Investment Trust said: “Clients want professional investors to beat the index and you really can’t do that without taking risk.  There are many different types of risk an investor can take.  After sometimes painful trial and error earlier in our careers, Michael Lindsell and I came to the conclusion that the type of risk that works best for us is to create highly concentrated portfolios, made up of big holdings in what we analyse to be very low risk/high quality companies.  The theory is that – if we get it right – the gains from a winning share are disproportionately great, because we have a big position size.  Meanwhile – if we make a mistake with our timing and buy a share that goes nowhere for a period – at least we own a piece of something reliable that ought to come good eventually.” 

Some fund managers have very clear views on portfolio concentration and risk when it comes to their own management style.  Gary Channon, Manager, Aurora Investment Trust since December 2015, said: “What we found was that lower concentration reduces the volatility of the fund but also reduces the long-term returns of our strategy. We concluded that lower returns were not a price worth paying for lower volatility.”

British Empire Trust, which has been managed by Asset Value Investors for over thirty years, has only 33 holdings in its portfolio.  Joe Bauernfreund became the sole portfolio manager of British Empire Trust on 1 October 2015 and has reduced the number of holdings from 47. Joe believes that a more concentrated portfolio differentiates it from the market. He said: "I own a high conviction portfolio that looks nothing like any index. Our value-focussed event-driven style results in an eclectic mix of companies where we see clear drivers for outperformance. You won't beat an index by mimicking it". 

Sam Cosh, Manager, European Assets Trust, said: “We aim to have between 40-60 stocks within European Asset Trust’s portfolio which we believe balances the right level of conviction and concentration with a sensible level of risk. The reality is that the larger the number of stocks in a portfolio, the more diverse the portfolio, but also the closer to the index you become, and the less the stock picking skills of the managers can be expressed. Meeting interesting small European companies and investing in them is the reason I do this job, and I want our shareholders to benefit from these active investment decisions. If you are prepared to do detailed, objective, fundamental research, and express this properly in the portfolio with conviction, you are more likely to deliver good returns to your shareholders over the long term.”

Andrew Graham, Manager of Martin Currie Asia Unconstrained Trust, commented: “The portfolio of 26 stocks makes it the most concentrated in the AIC Asia ex-Japan sector.  We aim to invest in between 20-30 stocks which provides ample diversification yet meaningful exposure to each stock. 

“The concentrated portfolio is an output of our Asia Long-Term Unconstrained investment philosophy and process that was specifically designed to find Asia’s best companies and provide the conviction to be a long-term investor.  We undertake a forensic analysis of at least five years’ worth of report and accounts.  The unique insight this offers into the financial health, prospects and corporate governance of each company often throws up specific questions that we then pose to management. 

“This additional analysis requires considerable time and resource, but when aligned to the team’s proprietary research and experience it’s invaluable in helping us to build conviction and aids decision making.   This differentiated approach proved attractive to the company’s board who adopted the strategy in July 2014.”

AIC member investment companies with 50 or fewer portfolio holdings

Source: AIC using Morningstar. Where indicated*, the data is directly from the managers of the investment company  

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Notes

1. The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment.  Today, the AIC represents a broad range of closed ended investment companies, incorporating investment trusts and other closed ended investment companies and VCTs.  The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help Members add value for shareholders over the longer term. The AIC has 345 members and the industry has total assets of approximately £150.7 billion.
2. Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance.  The value of investment company shares, and the income from them, can fall as well as rise.  You may not get back the full amount invested and, in some cases, nothing at all.