Concentrated mutual funds pullling in assets, not returns

Thu May 22, 2014 12:14pm EDT
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By David Randall

NEW YORK May 22 (Reuters) - Investors have been flocking to highly concentrated stock mutual funds in the hope that more daring bets will produce bigger returns, but it hasn't worked out that way.

So-called concentrated mutual funds - those that hold fewer than 30 stocks and are by nature risky - are growing far faster than other types of actively managed funds. But some 80 percent of these funds are posting performances that put them in the bottom half of their peers, according to data from S&P CapitalIQ.

Over the five years to December 2013, the assets invested in concentrated funds jumped from $44.5 billion to approximately $117 billion, according to data from fund tracker Morningstar, a growth rate 67 percent greater than actively managed funds as a whole.

The move to riskier funds may come, ironically, as a side effect of the growing popularity of passive index funds that only track market benchmarks. As indexing becomes mainstream, investors who choose to add any active funds to their portfolios are increasingly opting for those that offer the greatest chance of outperformance, even it comes with more risk.

The aging bull market and record-high stock prices, meanwhile, have convinced some financial advisers that they need to be more strategic and less sweeping in their bets.

"In order to beat the market you have to do something that ETFs don't, which is using specialized knowledge to know which areas or stocks to overweight," said Jeff Tjornehoj, head of Lipper research in the U.S. and Canada.