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Is your portfolio as diversified as you think?

Investment Analyst, Dominic Rowles looks at what concentration risk could mean for your portfolio, and what you should do about it.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

When you invest in a portfolio of funds, you might think diversification takes care of itself. But that's not always the case.

You should check what sort of companies your funds invest in as if they're too similar, they could rise and fall together, offering little diversification.

You might also want to look at how many companies your funds invest in or how 'concentrated' they are. If you invest in concentrated funds, the success of your portfolio could hinge on the performance of a fairly small number of companies.

This article is not personal advice. If you’re unsure whether an investment is right for you, please ask for advice. All investments can fall as well as rise in value so you may get back less than you invested.

Consider the concentration rules

When it comes to portfolio concentration, most of the funds on our platform are managed to one of two sets of rules – UCITS or NURS.

The Undertakings for the Collective Investment in Transferable Securities (UCITS) is an EU directive aimed at protecting investors. Its concentration rules are the stricter of the two. Funds managed to UCITS standards can't invest more than 10% of their assets in any one company. And investments bigger than 5% can't add up to more than 40% of the fund.

Non-UCTIS Retail Scheme (NURS) rules are less stringent when it comes to portfolio concentration – a fund can't invest more than 10% of its assets in any one company's shares.

Some funds tell you whether they're managed to UCITS or NURS rules on their factsheet. For those that don’t details can be found in the fund's Reports & Accounts. This can be found by searching for a fund and then clicking on the 'Key Features and Documents' tab.

Remember that even if a fund is managed to NURS standards, the manager might not use their freedom to adopt a more concentrated approach.

Fund in focus – Lindsell Train UK Equity

The Lindsell Train UK Equity fund is run by Nick Train, an experienced fund manager we hold in high regard. But investors in the fund should be aware that the fund is managed to NURS rules, giving the manager freedom to a more concentrated investment approach, which carries risk.

The fund's largest holdings are household names – from Unilever and Diageo to Burberry Group and Heineken. But they all make up a relatively large portion of the portfolio. In fact, the top 10 companies account for more than 80% of the portfolio. Some are close to 10% in size, which is as big as the rules allow. The fund currently invests in 26 companies overall.

The manager also invests a small amount of the fund in smaller companies, which are higher-risk than their larger peers.



Lindsell Train UK Equity: 10 largest investments

Company Portfolio allocation
Unilever 9.74%
Diageo 9.72%
RELX 9.72%
London Stock Exchange Group 9.32%
Mondelez Intl Group 8.99%
Hargreaves Lansdown 7.85%
Schroders 7.46%
Burberry Group 6.79%
Sage Group 6.60%
Heineken hldg NV 4.61%

Source: Lindsell Train Limited. Correct as at 31/05/2020.

Nick Train also manages the Lindsell Train Global Equity fund, alongside co-manager Michael Lindsell. It’s also a concentrated portfolio with investments in only 25 companies currently. However, this fund is managed to UCITS rules, meaning investments greater than 5% can't add up to more than 40% of the fund.

Remember, the fund covers companies of a variety of sizes including higher-risk smaller companies. It’s also an offshore fund so you’re not usually entitled to compensation through the UK Financial Services Compensation Scheme.



A concentrated portfolio is not all bad news

A concentrated portfolio isn't necessarily a bad thing though– great investors often go against the crowd.

Warren Buffett, widely regarded as one of the world's greatest investors, once had an investment in Coca-Cola so large it represented 35% of his entire portfolio. Many on Wall Street thought he was foolish, but they were proved wrong as the market value of Coke rose from $25.8 billion to $143.9 billion between 1989 and 1999.

The bigger an investment, the greater impact it can have on performance. A concentrated portfolio could deliver strong returns over the long term, provided the manager is a skilled stock picker and gets it right. But if the fund manager makes the wrong picks or something unexpected happens though, it could increase the risk of loss.

What should I do?

There's no right answer when it comes to how diversified or concentrated your portfolio should be. It all depends on your own circumstances and attitude to risk.

To work out how concentrated your current portfolio is, HL clients can use our online portfolio analysis tool. It will show which industries and countries you have the most invested in.

You can also see how many companies any fund invests in by viewing its factsheet. Looking at the size of the fund's top 10 investments will give you a good idea of its concentration too.

If you have a long time investment horizon and are prepared to weather some underperformance, you might be able to take more risk, so concentrated funds could form a larger part of your portfolio if you are happy to accept this level of risk.

But if you have a shorter time horizon, or a lower risk threshold, you might want to think about investing in a more diversified portfolio. Remember though concentration risk is only one of the risks you need to be aware of when considering funds.

Learn more about diversification

Both Lindsell Train Global Equity and Lindsell Train UK Equity Funds hold shares in Hargreaves Lansdown plc.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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