Focused Fund: Definition, Investing Strategies, and Example
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Summary:
Uncover the world of focused funds, exploring what they are, their unique investing strategies, and a real-life example with the Fidelity Focused Stock Fund.
Focused funds: a strategic investment approach
A focused fund, a specialized type of mutual fund, strategically narrows its investment scope to a limited number of closely related stocks or bonds. This targeted approach distinguishes it from diversified funds that spread investments across various sectors. Typically, focused funds concentrate on 20-30 companies, aiming to achieve a precise market exposure.
Understanding focused funds
In the realm of mutual funds, diversification often takes center stage. However, some investors deviate from this norm, opting for focused funds to capitalize on specific sectors or industries they anticipate will outperform. These funds, alternatively labeled as “under-diversified” or “concentrated,” rely on rigorous research for above-average stock picking. Despite lacking diversification’s risk mitigation, they offer the potential for more volatile yet rewarding returns.
Example of a focused fund: the fidelity focused stock fund
The Fidelity Focused Stock Fund serves as a noteworthy example, implementing key investing strategies to achieve its objectives:
- Investing focus: Allocating at least 80% of assets to stocks.
- Common stock emphasis: Primarily investing in common stocks.
- Limited portfolio: Maintaining a portfolio of 30-80 stocks.
- Global reach: Including domestic and foreign issuers.
- Style focus: Concentrating on “growth” or “value” stocks, or a combination of both.
- Analytical approach: Utilizing fundamental analysis for investment selection.
As of April 30, 2018, this fund demonstrated its prowess with a remarkable 10-year annualized return of 10.12%, surpassing its benchmark, the S&P 500, which stood at 9.02%. The fund’s gross expense ratio is a competitive 0.57%. Notably, the top 10 holdings, featuring industry giants like Adobe Systems Inc and Microsoft Corp, constituted a substantial 53.22% of the total fund.
Focused funds vs. diversified funds
While focused funds offer a unique investment strategy, it’s crucial to understand the distinctions between them and their diversified counterparts. Diversified funds, in contrast, disperse investments across various sectors to achieve a balanced and risk-mitigated portfolio. This divergence prompts investors to weigh the advantages and drawbacks carefully.
The bottom line
In essence, focused funds present investors with a distinct trade-off – the potential for higher returns in targeted sectors paired with heightened volatility. By deviating from the conventional wisdom of diversification, these funds rely on thorough research and a concentrated approach. The Fidelity Focused Stock Fund’s success underscores the effectiveness of this strategy, providing a compelling case for investors seeking a more focused and potentially rewarding investment path.
Frequently asked questions
What distinguishes a focused fund from a diversified fund?
Focused funds concentrate on a limited number of related stocks, while diversified funds spread investments across various sectors to mitigate risk.
How does a focused fund select its holdings?
Focused funds use in-depth research and analysis to strategically choose securities, often based on the fund manager’s conviction in specific sectors.
What role does diversification play in investment strategies?
Diversification aims to minimize risk by spreading investments across different asset types, while focused funds forgo this strategy for potentially higher returns.
Can individual investors benefit from focused funds?
Individual investors can benefit from focused funds if they have a strong conviction in a particular sector’s growth potential and are willing to accept higher volatility.
What are the key considerations before investing in a focused fund?
Investors should carefully assess their risk tolerance, market outlook, and the fund’s historical performance before considering a focused fund.
Key takeaways
- Focused funds provide targeted exposure.
- Strategic, research-driven stock selection is a key advantage of focused funds.
- Focused funds offer clear and focused market exposure.
- Higher volatility due to a lack of diversification is a potential drawback of focused funds.
- Investors should carefully assess their risk tolerance before considering a focused fund.
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