…The funds with the largest exposure to an individual company
I have written before about the superior performance of concentrated funds, but it is possible to take it too far. If a manager invests an overly large proportion of his portfolio in one particular company it could leave investors exposed to a significant level of stock specific risk that could dominate the returns.
In my article ‘The funds that won’t diworsify your investment’ I looked at the evidence in favour of managers having a high conviction in their holdings. The data is pretty compelling, although it relies on them keeping a sensible balance.
This is much more likely to be the case with unit trusts and OEICs, which are not allowed to hold more than 10% of their total value in the shares of any one company unless they are an index tracker in which case it can be as much as 20%.
A maximum of four stocks can be held up to the 10% limit, with any other individual shareholdings capped at 5%. In theory this means that an open-ended fund could invest in as little as 16 stocks, although it wouldn’t be feasible in practice.
The most concentrated portfolios include: Fundsmith Equity, which normally holds between 20 and 30 stocks; Lindsell Train UK Equity with around 25; and Invesco Perpetual UK Aggressive that comes in at around 30.
There are no such restrictions with investment trusts, with the limits dictated by each individual mandate. This means that some of them can go well beyond the normal 10% allocation.
A good example is the Hansa Trust, a global fund that invests in a portfolio of quoted and unquoted special situations. At the end of August its largest holding was a Brazilian stock called Ocean Wilsons, which accounted for an incredible 28.1% of its assets.
Earlier in the year the fund had £100m of its £288m net asset value invested in the one company, which explains why the directors keep such a close watch on it and meet the management at least once a year, while visiting its facilities every two to three years.
Ocean Wilsons has various shipyards in Brazil where it operates container port and oil service facilities. Over the five years to the end of September the holding added 120p to the increase in the fund’s NAV with the rest of the portfolio contributing a further 206p, yet any such exposure has to be seen a significant risk.
At one stage, Marwyn Value Investors, the specialist UK smaller companies investment trust, had 67% of its portfolio invested in the television production company Entertainment One. The fund has recently announced the sale of its remaining stake and the proceeds of £103m have enabled it to increase the payment due to shareholders in November from £5m to £15m.
Majedie Asset Management and the Lindsell Train investment trust both have significant exposures to their investment management businesses. At the end of August these made up 23% and 29.9% of their assets respectively, which means that the performance will play a major role in determining their overall returns.
Other investment trusts with holdings in excess of 10% of their assets include: BlackRock World Mining, British and American, and Prospect Japan. This shows how important it is to study the details before investing in any of these funds.