Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Portfolio holdings: too many versus not enough
How many stocks, funds and bonds should you hold in a portfolio? While there is no definitive answer, it is a question we’re regularly asked by readers and so we will endeavour to explore this subject matter over the coming months in Shares.
Having a large amount of holdings in an investment portfolio is often considered ineffective.
Buying an index fund would be a much cheaper way of tracking the performance of lots of stocks. In contrast, having too few holdings can also be considered ineffective as you are spreading your risks too thinly.
Is 28 the magic number?
Syndicate Room chief executive Goncalo de Vasconcelos believes many venture capital-style funds have too few holdings.
‘Some of them only have seven or eight holdings which aren’t enough, in my view,’ he told me last week, pointing towards the high level of failures among early-stage companies which populate VCT and EIS funds.
He cited research by NESTA and Intelligent Partnership which showed EIS (and theoretically VCT) funds should have at least 28 investments in order to have a 95% chance of having one or more winners that provide a 10-fold return on investment.
Rules for other funds
As for more mainstream funds, unit trust and OEICs aren’t allowed to hold more than 10% of their assets in a single company. The aggregate of any holdings over 5% in the fund must not exceed 40% of the fund’s total assets.
Those rules will stop a fund becoming too dependent on a few holdings; yet some would argue there are still some tightly-concentrated funds.
A quick scan of the market tells us that Lindsell Train UK Equity (GB00B18B9X76) falls into the latter camp with just 26 holdings. Last month fund manager Nick Train said he wanted to buy more Unilever (ULVR) shares (already at 10% of the fund) but was constrained by portfolio concentration rules.
In comparison, Schroders QEP Global Core (GB00B5310487) has an astonishing 639 holdings – far too many, in our view, given it is not a tracker fund. Email us at firstname.lastname@example.org if you have any thoughts on optimal portfolio size and we’ll publish the best ones in a future edition of Shares. (DC)