Valeant meltdown puts spotlight on big mutual fund bets

Mon Nov 9, 2015 7:00pm EST
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By Ross Kerber
    BOSTON, Nov 9 (Reuters) - Mutual fund Sequoia's loss on
Valeant Pharmaceuticals International underscores the
danger of placing a big bet on an individual stock. But while
Sequoia is an extreme example, it is not the only mutual fund
doing it.
    Some 13 other domestic U.S. equity funds that manage more
than $1 billion in assets have placed 10 percent or more of
their portfolio in a single company, according to data from
Thomson Reuters' Lipper unit, with three of them holding above
15 percent. [Table below]
    For some investment advisers, that is a worry.
    "If you start to see something with more than 10 or 15
percent, then you start to question the very purpose of having
that mutual fund," said Tim Courtney, chief investment officer
of Exencial Wealth Advisors of Oklahoma City, which has $1.4
billion under management.
    Concentration is a hot topic in the industry since the
souring of Sequoia's bet on Valeant, a stock that
accounted for 29 percent of its assets at the end of June.
    Valeant shares have since dropped more than 60 percent,
pulling Sequoia's total return for 2015 to negative 8.9 percent
as of Friday, trailing all peers, according to Morningstar.
    The gamble on Valeant was extreme in an industry known for
risk aversion, and by far the most concentrated bet among $1
billion-plus domestic funds. The only mutual fund with a higher
allocation to its top security at mid-year was Nysa Fund
, a tiny small-cap portfolio with 35 percent of assets
in Ligand Pharmaceuticals Inc, according to Lipper. 
    The case for concentration is that a well-chosen stock can 
magnify a portfolio manager's best ideas over time, and that
blow-ups like Valeant are rare. But often the payoff on a
concentrated bet depends on timing. 
    Take for instance the $3.4 billion Putnam Equity Spectrum
Fund which was close to Sequoia in concentration with
20 percent of assets in satellite-TV provider Dish Network Corp
 as of Sept. 30. Dish had been a rising stock in 2014,
but has slumped this year, helping drag the fund 8.78 percent
into the negative, according to Morningstar. 
    Another concentrated fund is the well-known Fairholme Fund
, which had almost half its assets in insurer American
International Group at the end of last year. Manager
Bruce Berkowitz since cut the AIG stake to 10 percent as of Sept
30, for reasons a spokesman declined to discuss.      
 Fund Name        NASDAQ    name of top       % of portfolio
                  Ticker    holding           
 Sequoia Fund     SEQUX     VALEANT           29 pct 
                            INC ORD           
 Putnam Equity    PYSAX     DISH NETWORK      20 pct
 Spectrum Fund;A            CORP ORD          
 CGM Focus Fund   CGMFX     LENNAR CORP ORD   17 pct
 Voya Corporate   LEXCX     UNION PACIFIC     16 pct
 Leaders Trust              CORP ORD          
 AMG Yacktman     YAFFX     PROCTER & GAMBLE  13 pct
 Focused                    CO ORD            
 sources: Lipper, fund disclosures

 (Reporting by Ross Kerber; Editing by Richard Valdmanis and
Alan Crosby)