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How to Avoid Overlap

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How to Avoid Overlap

If you’re worried about duplication, remember these tips when building your portfolio.

Things To Know

  • Two funds by the same manager may own the same or similar holdings.
  • If two funds from the same category sport similar sector weightings, they may own many of the same stocks.

Don’t buy multiple funds run by the same manager

Zebras don’t change their stripes, and managers often gravitate to the same stocks for multiple portfolios. That’s because fund managers have ingrained investment habits that they apply to every pool of money they run. So if you buy two funds by Famous Manager A, chances are you’ll own two of the same thing.

Don’t overload on one boutique’s funds

Some fund families, such as Fidelity, T. Rowe Price, and Vanguard, offer lineups of funds that span a variety of investment styles. Other shops, called boutiques, prefer to specialize in a particular style. One is a small-cap specialist, another means value, and still another equals Asia. Boutique families are often excellent at what they do, but it’s questionable whether owning three of their funds gives you anything you won’t get with one.

Take the four-corners approach

An online tool like the Morningstar Style Box can be a diversifier’s best friend. The Style Box will not only tell you whether your manager is snapping up large-value stocks, but it also can lead you to funds that bear little resemblance to one another.

Value funds don’t act much like growth portfolios, and small-cap funds behave differently from large-cap offerings. In style-box lingo, opposite corners attract. If you own a large-value fund from your favorite fund company, you might try one of its large-growth, small-value, or small-growth offerings.

Don’t assume that your portfolio’s weightings must be evenly dispersed across the style box, though. Although the U.S. market has a fairly even distribution across value, blend, and growth investing styles, large-cap stocks make up roughly 75% of the value of the U.S. market.

Manage your sector weightings

If two funds from the same category sport similar sector weightings, they may own many of the same stocks.

Determine how much overlap you might have

You’ve followed these tips and have put together a portfolio of investments or possible investments. To test for overlap, you could enter all of the investments—both the stocks you’ve bought directly and every stock that your mutual funds own—into a spreadsheet and sort by stock name. That’s a lot of work. But there are alternatives. Some online research firms, such as Morningstar, offer tools that can do this overlap analysis for you.