Course 110: Avoiding Overlap When Building a Portfolio
How to Avoid Overlap
In this course
1 Introduction
2 How to Avoid Overlap
3 Using Morningstar.com's Portfolio X-Ray

If you're worried about duplication, remember these tips when building your portfolio.

1. Don't buy multiple funds run by the same manager. Zebras don't change their stripes, and managers often gravitate to the same stocks for multiple portfolios. That's because fund managers have ingrained investment habits that they apply to every pool of money they run. So if you buy two funds by Famous Manager A, chances are you'll own two of the same thing.

2. Don't overload on one boutique's funds. Some fund families, such as Fidelity, T. Rowe Price, and Vanguard, offer lineups of funds that span a variety of investment styles. Other shops, called boutiques, prefer to specialize in a particular style. Royce is a small-cap specialist, Oakmark means value, and Matthews equals Asia. Boutique families are often excellent at what they do, but it's questionable whether owning three of their funds gives you anything you won't get with one.

3. Take the four-corners approach. Using the Morningstar Style Box can be a diversifier's best friend. The style box will not only tell you whether your manager is snapping up large-value stocks, but it also can lead you to funds that bear little resemblance to one another.

Value funds don't act much like growth portfolios, and small-cap funds behave differently from large-cap offerings. In style-box lingo, opposite corners attract. If you own a large-value fund from your favorite fund company, try one of its large-growth, small-value, or small-growth offerings.

Don’t assume that your portfolio’s weightings must be evenly dispersed across the style box, though. Although the U.S. market has a fairly even distribution across value, blend, and growth investing styles, large-cap stocks make up roughly 75% of the value of the U.S. market.

4. Manage your sector weightings. If two funds from the same category sport similar sector weightings, they may own many of the same stocks.

5. Determine how much overlap you might have. You've followed these tips and have put together a portfolio of investments or possible investments. To test for overlap, you could enter all of the investments--both the stocks you've bought directly and every stock that your mutual funds own--into a spreadsheet and sort by stock name. That's a lot of work. Morningstar.com offers a Portfolio X-Ray feature called Stock Intersection that can do this overlap analysis for you. (Note that Portfolio X-Ray is a feature available only to Morningstar.com Premium Members, but you can take advantage of a free 14-day trial.)

Next: Using Morningstar.com's Portfolio X-Ray >>


Search
Print Lesson |Feedback
Del.icio.us Del.icio.us | Digg! digg it
Learn how to invest like a pro with Morningstar’s Investment Workbooks (John Wiley & Sons, 2004, 2005), available at online bookstores.
Copyright 2015 Morningstar, Inc. All rights reserved. Please read our Privacy Policy.
If you have questions or comments please contact Morningstar.