The CCM Intelligent Wealth Fund adopts a concentrated portfolio with a high conviction strategy which has contributed to our fund achieving stellar returns over the last 12 months.
https://www.trustnet.com/factsheets/o/oxo8/ccm-intelligent-wealth-r-inc
So what do I mean by a concentrated portfolio and what is high conviction?
Let’s start with a concentrated portfolio.
Most funds have a diversified portfolio of shares typically 40-50 holdings. Partly this is because diversification is required under the regulations. Most OEICs for example have to follow the 5:10:40 rule. A UCITS may not invest more than 5% of its assets in securities of a single issuer, although this limit can be increased to 10% per single body as long as the total value of all holdings exceeding 5% does not exceed 40%.
The CCM Intelligent Wealth Fund is a specialist OEIC known as a NURS which means it only has to adhere to the 10% rule meaning it cannot invest more than 10% in any one individual holding.
Interestingly some of the greatest investor gurus disagree on the best approach.
Warren Buffett once stated, “Diversification may preserve wealth, but concentration builds wealth.” On the other hand, Jack Bogle the founder of Vanguard was quoted as saying “Don’t look for the needle in the haystack. Just buy the haystack!”
What is a Concentrated Portfolio?
A concentrated portfolio can be said to be a portfolio that holds a small number of different securities to have a level of diversification. It can consist of 10 stocks or even less than that. A concentrated portfolio may increase your risk but with higher risks comes the potential for higher reward. One of the world’s most successful investors Warren Buffett himself advocates this idea and he says that ‘‘An investor should act as though he had a lifetime decision card with 20 punches on it.” That means with every investment decision that he makes, his card will get punched, and he will be left with fewer cards for his rest of the life.
Let us also discuss the risks related to it, the first risk that comes with the concentration portfolio strategy is Portfolio concentration risk.
What is concentration risk?
It is a banking term that is used to describe the level of risk in a bank’s portfolio arising from the concentration to a single counterparty, sector or a country. More concentration leads to less diversification therefore the returns on the underlying assets are more correlated.
With Securities Concentration there is a risk of suffering losses that may occur as the investors have a large portion of their holdings in one particular investment class or market segment in relation to their overall portfolio.
What is a diversified portfolio?
A diversified portfolio means a portfolio in which the assets do not correlate with each other. It lowers your risk, as no matter what the economy does, few of your asset classes will definitely perform. The main reason why risk will be reduced is because it is rare that the entire portfolio would be wiped out by any single black swan event.
Benefits of diversification
Diversification strategy reduces the overall level of volatility and risk. The simple reason is because when investments in one area perform poorly for you the other investments can offset their losses.
While diversification is a good strategy to reduce risk, it can also be a disadvantage for you as over-diversification can lead to low returns.
Investors who aim to beat the market can choose concentration vs. diversification as per their risk appetite.
While diversification strategy is a good way to preserve wealth, concentration is often a better way to build a fortune.
High conviction
We are hardwired to believe sticking together is more likely to result in a positive outcome. However, when it comes to investing you often can’t outperform unless your strategy differs from the crowd.
High conviction is, well, as the phrase suggests, just that. High conviction.
Our high conviction is embodied in the seven futuristic themes or megatrends of our fund.
‘Active share’ is a metric which measures the extent to which a fund’s holdings vary from its benchmark. The higher the active share figure, the more deviation there is from the fund’s benchmark. A 2010 study* found that funds with an active share of over 80% outperformed their benchmarks by an average of 1.14% per year after fees. In contrast, those with an active share of less than 60% very closely tracked their benchmarks.
Another measure of conviction is the concentration of the fund. Fewer holdings mean each one has a greater impact on performance. A high conviction strategy should increase the probability of outperformance over the longer term, provided the manager is a skilled stock picker and gets it right. However a high conviction approach may lead to greater volatility, a measure of risk, and investors are more likely to face periods of underperformance. If the fund manager makes the wrong picks the losses will be exaggerated.
It is an approach we favour because it allows us to focus on our best ideas and use our skills to enhance returns with as few constraints as possible.
Our target optimal portfolio size is 30 holdings which gives us concentration and 10 of our holdings represent 50% of our fund which gives us high conviction.
We believe the CCM Intelligent Wealth Fund will continue to outperform with such a concentrated, high conviction strategy. You know it makes sense**.
*Petajisto; “Active Share and Mutual Fund Performance”, December 2010
**The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change.
