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Do concentrated funds outperform?

High conviction equity portfolios tend to have a higher likelihood of outperforming the index than broadly diversified portfolios, argues Willis Towers Watson.
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Equity fund managers are able to add more value for investors if they are able to run concentrated portfolios that consistently beat the market, argues Stuart Gray, London-based senior director for investment at Willis Towers Watson, which consults institutions globally of manager selection as well as fund and asset allocation.

“You can always find manager skill in even the most efficient markets. In the US, for example, you can find generally skilled managers that run really concentrated portfolios with very high conviction stock selection, as opposed to those that might hold a hundred stocks that will look like the broad index,” Gray told FSA during a recent visit in Hong Kong.

Out of the 76 SFC-authorised US-focused equity funds, which include passive funds, only 18 (23%) active products outperformed the S&P 500 index on a three-year annualised basis, according to data from FE Analytics.

In addition, there is some truth that more concentrated portfolios perform better than their more diversified peers. FE and Morningstar Direct data show that of the top 10 best-performing US equity funds during the same period, eight of them each have at least 40% of their assets in their top 10 holdings.

On the flipside, eight of the 10 worst performers each have their top 10 holdings allocations at below 40%. However, there are other factors that may affect performance, such as individual security selection or style biases.

Top 10 SFC-authorised US equity funds on a three-year annualised basis


Number of holdings

% assets in top 10 holdings
Wells Fargo Worldwide US Large Cap Growth in US



JPM US Growth TR in US



T. Rowe Price US Large Cap Growth Equity in US



T. Rowe Price US Blue Chip Equity in US



Janus Henderson US Forty in US



Wells Fargo Worldwide US All Cap Growth in US



MFS Meridian US Concentrated Growth in US



Morg Stnly US Advantage in US



AB Concentrated US Equity Portfolio in US



BlackRock GF US Growth in US



Source: Performance data from, FE Analytics; holdings data from Morningstar Direct. In US dollars.


Bottom 10 SFC-authorised US equity funds on a three-year annualised basis

Fund Number of holdings % assets in top 10 holdings
Natixis Harris Associates US Equity in US 46 37
Invesco US Structured Equity in US 82 18.13
Legg Mason ClearBridge Value in US 50 41.29
Invesco US Equity TR in US 69 26.63
BlackRock GF US Basic Value in US 69 32.07
Franklin Mutual U.S. Value in US 64 25
Legg Mason ClearBridge US Aggressive Growth in US 63 49.28
Eastspring Inv North American Value in US 54 25
Fidelity America in US 53 36.1
Wells Fargo Worldwide US Select Equity in US 36 31
Source: Performance data from, FE Analytics; holdings data from Morningstar Direct. In US dollars.


Gray does not snub all diversified funds, however. Quant funds, for example, which typically hold around 100 stocks, can be beneficial to investors, he said.

“In the quant space, a manager may be skilled in looking at several factors and how they package that product. We might ask some managers that are particularly good at looking at certain factors and ask them to take those factors and implement a strategy for us.”

More concentrated but diversified

While most concentrated products available to the market have around 40-50 stocks, Willis Towers Watson prefers more concentrated portfolios of just 10-20 positions, according to Gray.

“Our clients may have different objectives and risk tolerance. But if, for example, we had full control [of their asset or fund allocation], we prefer having high conviction portfolios of just around 10-20 stocks.”

Gray explained that Willis Towers Watson works with fund managers to run highly concentrated portfolios because there may be regulatory constraints limiting such products to the retail market.

“We would tell [fund managers] ‘we think this is the best way of capturing the stock selection skill that you have, so can you work with us to run a separate account with a more concentrated portfolio?’,” he said.

Gray acknowledged that holding only 20 stocks can make the product volatile.

“Concentrated portfolios are very volatile by themselves, so we diversify by combining five-to-10 different managers with very different concentrated portfolios.

“Unlike just having a diversified fund managed by only one manager, you get a diversified portfolio with a lot of stock selection skill within it.”

Part of the Mark Allen Group.