When a mutual fund has 80, 100 or 200 stocks in its portfolio, it's hard to call it a stock-picker's portfolio. Full portfolios are usually described as "diversified"-in some cases, "over-diversified." One of the advantages of diversification is that it's supposed to lessen the performance blow in down or volatile markets. The disadvantage is that highs may be hard to reach.
The portfolios of nondiversified funds like Van Kampen's Focus Equity Fund typically have only a few dozen stocks. The right portfolio manager-assuming he or she can hone in on the right stocks at the right time-can make a nondiversified fund sing.
But that hasn't always been the case. In the 1980s, focused funds had a hard time topping charts. What changed that? Technology.
"I think the time sensitivity has changed," says Phil Friedman, lead co-manager of the Focus Equity Fund. According to Friedman, the portfolio manager who had the edge in the 1980s was the one who got the first call back from a company's CFO. But as conference calls replaced phone calls, hundreds of people-not just those on the other end of the line-were privy to breaking corporate news. Today, corporation news spreads instantly via the Internet-and goes out to millions. To get ahead, Friedman says, "You need to react yesterday to tomorrow's news."
Friedman has worked in the financial industry for nearly 20 years and knows the power an information edge can bring. "We tend to be very research-intensive," says Friedman. "And whether it's meeting management at their offices or pushing aggressively to have management come to ours, you have to go beyond reading the 10K and look management directly in the eye. That's very important to us."
The strategy has paid off. At the end of 1999, the fund was up 45.7 percent, well ahead of its peers and the S&P 500. You'll find between 35 and 45 stocks in the Focus Equity fund with the top names making up 46 percent. That kind of concentration means every name counts. So when looking for companies, it's those showing growth momentum rather than price momentum that attract Friedman.
When screening companies, Friedman generally looks for those with earnings growth of at least 15 percent and whose businesses are as good as, if not better than, what Wall Street thinks. "You don't buy stock because everyone believes it's a growth stock," he says. "You buy it because you believe it is."
Friedman likes to invest with that kind of conviction. The
downside? Pick the wrong stocks and fund performance could suffer.
But with about 32 percent of Focus Equity's assets invested in
tech stocks at year-end 1999 and names like Cisco represented, so
far he's been in the right place at the right time.
"People think concentration leads to higher risk," Friedman says. "We believe concentration leads you to better understand the portfolio and the names that you own." And while that's true, don't take the risk factor too lightly. The smaller the handfuls, the greater the risks may be.
Dian Vujovich is a nationally syndicated mutual fund columnist and author of 101 Mutual Fund FAQs (Chandler House Press). For free educational mutual fund information, visit her Web site, www.diansfundfreebies.com.