Have you checked if your fund investments contain the same holdings?
Have you ever looked at a fund or investment trust’s top 10 holdings and thought the list sounded familiar? There is a growing fear that too many funds are undifferentiated and investors may not realise they are exposed to the same underlying holdings if they hold multiple funds in the same space.
This week’s Funds section in Shares looks at the concept of active share which shows how you can spot funds whose portfolios differ from the benchmark index.
Active share data won’t help to spot funds which have similar holdings to another product, if all the holdings are different to the benchmark. Instead you’ll have to do some homework yourself, both when making the original investment in a fund and on an ongoing basis.
CURRENT POPULAR HOLDINGS
Investment bank UBS issues a weekly publication which highlights the stocks that are most overweight and underweight by global active fund managers across different regions and countries.
It adds up the holdings in dollar value across all the active managers and calculates the weights of stocks in this active trading portfolio. It then compares this weight with the relevant equity index benchmark to form the active weight.
In the MSCI AC World index, the top five overweight stocks are currently Alibaba, Alphabet (Google’s parent company), UnitedHealth, Microsoft and Visa. The top five underweights are Apple, Exxon Mobil, AT&T, Berkshire Hathaway and Johnson & Johnson.
A good example to explore is technology-dominant investment trust Scottish Mortgage (SMT) whose portfolio includes Amazon, Alibaba, Netflix and Tencent. Two of these stocks also appear in Allianz Technology Trust’s (ATT) top holdings; and two appear in Polar Capital Technology Trust’s (PCT) top holdings.
You may initially think all three portfolios have a lot of similarities because they contain well-known tech names, yet they also have a lot of differences including different names and also different weightings for the aforementioned shared interest stocks.
COMMON ISSUE WITH INCOME FUNDS
Many UK equity income funds have similar holdings such as HSBC (HBSA), Royal Dutch Shell (RDSB) and British American Tobacco (BATS) as these are the obvious stocks with generous dividends in the FTSE 100.
If you hold numerous income funds in your portfolio, there could be a high chance you have significant exposure to these stocks.
That reduces diversification and means you double up, or even triple up, on certain names. If something goes wrong with one or two of
these names, it could result in a knock for your overall portfolio.
One way to avoid this situation is to use Morningstar’s X-Ray tool which lets you evaluate your overall asset allocation and sector weightings as well as uncover concentrated positions. Morningstar charges for this service but you can get it for free with some investment platform providers including AJ Bell Youinvest. (DC)