Jeff Tjornehoj
Jeff Tjornehoj, head of Americas research for fund data analytics firm Thomson Reuters Lipper, Denver. LipperAlpha.Financial.ThomsonReuters.com
The Sequoia Fund’s legendary status did it little good when its huge investment in a single risky biotech stock imploded over the past year, helping drive down the fund’s share price as much as 29%. Unlike Sequoia, whose investment in Valeant Pharmaceuticals International grew to 30% of the fund’s overall assets and whose dominant stock plummeted by as much as 90%, most funds spread their assets among many stocks. But from time to time, a fund manager becomes so convinced that a stock provides a golden opportunity that his/her fund makes an unusually large bet on a single stock—a bet that could make many investors uncomfortable.
How to avoid funds that bet too big on a single stock…
Reassess your fund if any one stock amounts to 10% or more of its assets. The Securities and Exchange Commission no longer considers a fund to be diversified once it has more than 5% of its portfolio in a single stock. I get worried when a position hits 10% because that’s when it could badly hurt performance and/or heighten volatility. About 50 stock funds recently held at least 10% of assets in a single stock. Examples: Nysa Fund (NYSAX), with 41% of assets in biotech firm Ligand Pharmaceuticals…and CGM Focus (CGMFX), 21% in home builder Lennar Corp.
Research how risky the top stock holding has been. For example, I’m not very worried about AMG Yacktman Focus (YAFFX) having 12% of its assets in Procter & Gamble, which over the past three years has been one-third less volatile than the S&P 500 stock index. On the other hand, Putnam Equity Spectrum (PYSRX) recently had 25% of its portfolio in shares of Dish Network, which has been 26% more volatile than the S&P 500.