What to Look For in a Focused Fund

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What to Look For in a Focused Fund

If you think your investment portfolio could use a focused fund, look for the following five qualities before you buy.

Experienced management

Because so much rides on the individual stocks in a focused fund’s portfolio, it is crucial that you look for a fund run by a seasoned manager. Few fund managers cut their teeth on a focused fund. Usually, they get their start in the industry running fairly well-diversified portfolios. Look at the performance and risk records of the funds the manager has run in the past. Did those funds produce better performance than their category peers? It’s even better if a manager already has a long and solid record running a focused fund.

A reputable fund family

In conjunction with an experienced manager, look for focused funds from established fund families. Some firms are better known for their stock-picking ability than others, and families that offer extensive research capabilities are probably a good bet. Also, look for a fund from a family known for its quality control. Does the family tolerate long periods of underperformance? Or does it take action, as some do does with subadvised funds when they see something they don’t like? (A fund is subadvised when the company offering the fund hires outside managers to run it. Some do that with many of their non-index equity funds.) Families with reputations to protect are likely to be more vigilant than recent startups that have nothing to lose.

Strong long-term performance

You may be attracted to a focused fund because of a great quarter or sensational year. But because focused funds are linked so tightly to a few stocks or sectors, most of them will have a few glory days. Instead, look for a fund that has done well over time. If managerial experience at a previous fund is not available, then make sure the fund you’re interested in buying possesses at least a solid three-year record.

Modest expenses

As with any other fund purchase, check the cost before you write your check. You should avoid any focused fund with an expense ratio higher than 2%.

Risk-busting approach

Most focused funds are risky investments by their very nature, but even in this arena there are ways you can reduce risk. Consider a fund that follows a value strategy (or is at least valuation-conscious), rather than a growth strategy. You might also consider a fund that’s focused in its number of holdings but that has some sector diversification, making it less vulnerable to economic cycles.