Key Takeaways
- A focused fund is a mutual fund that invests in a limited number of stocks or bonds, emphasizing a specific attribute or sector.
- These funds limit their holdings to about 20-30 companies, unlike diversified funds with over 100 positions.
- Focused funds aim to exploit researched opportunities for higher returns but come with increased risk and volatility.
- They do not benefit from diversification yet rely on stock-picking expertise for potential above-average returns.
- Focused funds may suit investors confident in a particular sector’s performance but are riskier than diversified portfolios.
What Is a Focused Fund?
A focused fund is a category of mutual fund that invests in a limited number of stocks or bonds, concentrating on a specific sector or theme. It allows investors to target potential high-growth areas by focusing on a limited number of securities, but it also involves increased risk due to the lack of diversification.
How Focused Funds Operate
Mutual funds are often marketed as a good way to diversify a portfolio of investments. Indeed, most mutual funds are designed to hold a position in a large number of companies, with various pre-defined weights, saving the investor the trouble of selecting each security individually. This diversification allows an investor to gain access to the equity risk premium while minimizing risk and volatility.
However, some investors feel that diversification can also limit returns by spreading money from several sectors or companies, not all of which are likely to outperform at the same time. If an investor feels strongly that a certain sector or industry will outperform shortly, they can increase returns by concentrating investments in that sector.
Fast Fact
Many sector ETFs have the characteristics of a focused fund.
Focused funds allocate their holdings between a limited number of carefully researched securities. Although they do not experience the benefits of diversification because of the “search for quality” strategy, focused funds rely on research expertise for the above-average stock picking. As a result, returns tend to be more volatile. This fund is also known as an “under-diversified fund” or “concentrated fund.”
Focused Fund Example: The Fidelity Focused Stock Fund
The Fidelity Focused Stock Fund has the following principal investing strategies:
- Normally investing at least 80% of assets in stocks
- Normally investing primarily in common stocks
- Normally investing in 30-80 stocks
- Investing in domestic and foreign issuers
- Investing in either “growth” stocks or “value” stocks or both
- Using fundamental analysis of factors such as each issuer’s financial condition and industry position, as well as market and economic conditions, to select investments
The Fidelity Focused Stock Fund had a 10-year annualized return of 10.12%, as of April 30, 2018, compared to 9.02% for its benchmark, the Standard & Poor’s 500 index. The Fidelity Focused Stock Fund has a gross expense ratio of 0.57%. Its 10 largest holdings, as of April 30, 2018 were:
- ADOBE SYSTEMS INC
- SQUARE INC CL A
- S&P GLOBAL INC
- INTUIT INC
- UNION PACIFIC CORP
- MICROSOFT CORP
- HUMANA INC
- SCHWAB CHARLES CORP
- PAYPAL HLDGS INC
- BANK OF AMERICA CORPORATION
Combined, these ten holding accounted for 53.22% of the total fund.