Just examining the equity portion of a portfolio, the table below highlights a typical set of categories along with the average number of stocks held for actively-managed funds in each category. Investors buying an average fund in each of the nine categories would end up with a staggering 1,976 positions in their equity allocation alone.
AVERAGE NUMBER OF STOCKS HELD BY EQUITY FUND CATEGORY* (July 31, 2018)
* Number of stock holdings include long positions only. Source: Morningstar, July 31, 2018.
The wholesale adoption of asset allocation models along with the introduction of other asset classes and sub-asset classes has fueled the propagation of categories and funds to the point where Morningstar now has 117 categories and 29,916 mutual funds. Firms, advisors and investors allocate across these categories with one or more funds in countless ways. The situation is further compounded by the fact that most individual funds, in efforts to dampen volatility or track a category benchmark, are over-diversified. Finally, investors tend to have buckets of money and multiple investment accounts for a wide variety of reasons. This often results in a haphazard collection of investments and holdings.
A better approach, particularly for a growth-oriented portfolio, is to invest in a handful of different specialized funds that are “truly active” with a narrowly defined strategy and high conviction positions. The result is a high-quality active equity portfolio that is strategy diverse with a few hundred well curated positions.
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