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I am concerned that your portfolio contains too few stocks for a diversified investment. Do you intend to increase your number of holdings or is there a good reason why you have less than 35?.

 

Some level of diversification is important but a fund should not be overdiversified. If you were to construct a portfolio of a select number of FTSE 100 stocks, the risk falls sharply as the portfolio increases in number from just one stock up until it has reached 25-35 stocks. However, by the time it has reached 25-35, most of the reduction in risk that can be attained has already been achieved. Adding further stocks is problematic for two reasons.
 
Firstly, doing so fails to reduce risk much further but does require a compromise on conviction. This is because the more stocks you own, the less you know about each of them. Forcing yourself to invest in something where you have less conviction about future outperformance whilst achieving nothing in return is not a sensible strategy. Secondly, the risk of becoming a closet index tracker grows. 
 
Active management is about trying to achieve superior returns to the overall market index. After 35 stocks, the more stocks a fund manager holds, the more likely they are to perform in-line with the overall index. In this instance, an investor would be better served buying a cheap passive ETF index tracker instead of paying a higher management fee to an “active” manager who achieves the same result. We believe investors should be very suspicious of managers who own more than 35 stocks.

 

 

 

 

 

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