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Should You Own More than One of the Same Fund?

How many UK equity income funds do you have? What about global growth? Owning multiple funds is not always a good way to diversify your portfolio

Emma Wall 31 October, 2017 | 8:54AM

Investors who own more than one fund are more diversified than those who own just one – right? Wrong. At least, not if those funds actually hold the same stocks. Research by Morningstar published last week revealed that there was significant overlap between UK Equity Income funds. Three companies are owned by eight of the 10 biggest funds in the sector by assets under management, many more stocks feature in multiple portfolios, including those run by Neil Woodford, Schroder’s Kevin Murphy, Threadneedle’s Richard Colwell and Clive Beagles at JOHCM.

Similarly, top-rated UK smaller company funds show some overlap – with SLI UK Smaller Companies, Artemis UK Smaller Companies and Old Mutual UK Smaller Companies all holding the following stocks; Sanne Group, Dechra Pharmaceuticals, FDM Group and XP Power.

The dangers of doubling up on holdings becomes apparent when a stock falters – take AstraZeneca (AZN) earlier this year for example. The pharmaceutical firm saw its share price dip 16% after a disappointing drug trial, and many UK equity income funds fell with it. When BP (BP.) suffered its oil spill, the share price dropped 30% and global equity, UK equity and even ethical funds dropped in value too.

Go Global for Diversity

Going global lessens the chance of overlap – fund managers have a much bigger pool in which to fish for opportunities. But only if the manager takes advantage of their full remit – as Morningstar data has shown before, often every single one of the top 20 stocks found in a typical global equity income fund is listed in either the UK, US, Switzerland or France.

Gold Rated Veritas Global Equity Income and Bronze Rated Artemis Global Income have just one stock in common – Pfizer (PFE), impressive when you consider they have 110 holdings between them, although this is a tiny fraction of their investable universe. The MSCI All World Index has 2,400 constituents.

Global growth funds Gold Rated Fundsmith Equity and five-star Lindsell Train Global Equity have five stocks in common, Unilever, Diageo, PayPal Holdings, PepsiCo and Dr Pepper Snapple. Both funds hold a concentrated portfolio of 29 and 27 holdings respectively.

Similarly concentrated and newly launched fund Blue Whale Growth also holds Paypal and Unilever, manager Stephen Yiu exclusively reveals to Morningstar, but says the rest of the portfolio is unique, meaning it could be suitable for an investor who already holds one of the other global growth vehicles – as he points out the dissimilarities between the largest holdings in the funds.

“An investor is likely to be better off investing across these three funds, than to buy a single diversified global fund with more than 75 stocks,” says Yiu. “The number of unique holdings across the three funds’ top-10 stocks is 27 companies.”

Investors concerned about double – or even triple – exposure to individual companies should check their top 10 holdings, or use an X-ray tool to work out where the weaknesses lie. While overlap between small allocations may not be cause for concern, having two funds with matching top 10 holdings should be avoided.  

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Artemis Global Income I Acc134.57 GBP0.67
Artemis UK Smaller Companies I Acc1,714.29 GBP-0.23
AstraZeneca PLC4,975.00 GBX-0.72
BP PLC493.10 GBX0.40
CF Blue Whale Growth I GBP Acc1.07 GBP1.25-
Fundsmith Equity I Acc3.66 GBP0.83
Lindsell Train Global Equity D1.98 GBP0.18
Old Mutual UK Smaller Coms R GBP Acc278.04 GBP0.57
SLI UK Smaller Companies Inst S Acc87.91 GBP0.69
About Author Emma Wall

Emma Wall  is Senior Editor for Morningstar.co.uk