The Flexible Investing Playbook: Asset Allocation Strategies for Long-Term Success

Chapter 8. Concentrated Equity Investing

As you now know, I started touting the benefits of hybrid mutual funds long before investors, industry media, and the fund industry itself began to pay attention to them. The same is true with the second of the three portfolio allocation strategies I manage, concentrated equity. Finally, after years of playing second fiddle to overdiversified ("de-worse-ified") equity funds, the benefits of owning fewer stocks in a manager's portfolio are being recognized. I suppose a year like 2008 acts like a heavy rainstorm. Ideas and concepts finally make their way to the surface, like worms on the sidewalk after that storm.

My Favorite Article on Concentrated Mutual Fund Investing

The Wall Street Journal's Larry Light wrote an article on October 9, 2009, entitled "OK, Now Concentrate." The subtitle of the article said, "Some managers run focused funds with 40 or fewer stocks. That approach can make performance more volatile—but, surprisingly, not always." I have always been a big fan of the Wall Street Journal, and now I am a fan of Larry Light and his editors, too. In a small number of words, he summarized this entire chapter, and the entire concept of concentrated equity investing. It is a useful strategy, but requires a more comprehensive research effort than simply picking funds off a performance list. I will explain that as this chapter continues.

For Mr. Light's article, the Wall Street Journal requested a research study from fund analysis and rating ...