The desirability of a fund with a concentrated portfolio is widely debated and often depends on the investor’s risk appetite.
While the selling point for funds with a large number of stocks is that they are well diversified and are better protected from any potential headwinds, others argue that stocks in a concentrated fund are more carefully selected.
Not only this, it can indicate that the fund manager has a high level of conviction in their stocks, which can reassure investors that the companies selected are better suited to their aims. 
We looked through the Investment Association universe for funds that have a relatively concentrated portfolio as well as holding an FE Crown rating of four or five to highlight a few in the following article. FE Analytics came up with 12 in total.
The top performing fund over five years is Old Mutual Equity 1, a four FE Crown-rated fund with 67 holdings that is headed up by FE Alpha Manager Richard Watts (pictured).
Since Watts took the helm of the fund in April 2010, it has returned 133.69 per cent, outperforming its average peer in the IA UK All Companies sector by more than double.
Performance of fund vs sector over manager tenure
Source: FE Analytics
The £125m fund predominantly consists of UK and while it can invest right across the market cap spectrum, it will mostly hold mid-cap or small-cap stocks. Barratt Developments, Just Eat and Ashtead Group are its top three holdings.
This fund isn’t the only high-conviction UK fund to have done well, as six more make up the 12 funds that have performed well over five years, are highly-rated by the FE Research team and have a concentrated portfolio.
With 61 holdings, Standard Life Investments UK Equity Income Unconstrained comes in second place for its performance, having outperformed its sector average by 42.15 percentage points over five years.
The five FE Crown-rated fund also has an FE risk score of 80 which means that, despite its small number of holdings, it has shown 80 per cent of the FTSE 100’s risk over recent years.
Thomas Moore’s fund, which has been awarded an ‘A’ rating by the Square Mile research team, yields 3.58 per cent and has a clean ongoing charges figure (OCF) of 1.15 per cent.
The other UK funds of a similar ilk that are worthy of note are Majedie UK Focus, R&M Equity Unconstrained and Standard Life Investments UK Equity High Income.
Two concentrated UK portfolios that are highly-rated and have a particularly low number of holdings are the four FE crown-rated Threadneedle UK Equity Alpha Income and Threadneedle UK Select funds, which consist of 30 and 40 stocks respectively.
Managed by FE Alpha Manager Leigh Harrison since 2006 and co-managed by Richard Colwell since 2010, the £875m Threadneedle UK Equity Alpha Income fund is still lower risk than the FTSE 100 with a risk score of 93, and has outperformed its benchmark and sector average over three and five years, achieving top-quartile returns over both time frames.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The fund also has a yield of 4.2 per cent and a clean OCF of 0.88 per cent.
Threadneedle UK Select has a marginally higher risk score of 98 despite its higher number of holdings and is second quartile over three and five years. The £207m fund mostly invests in large-caps that are a blend of both value and growth stocks, and holds Crest Nicholson Holdings, Imperial Tobacco Group and St James’s Place as its three largest holdings.
Moving across the pond, two out of the 12 highly-rated and highly-concentrated funds invest mostly in US equities.
Five FE Crown-rated Legg Mason Opportunity is top decile over three years, having outperformed its sector average in the IA North America sector as well as its benchmark by more than double.
The $336m fund has been managed by Samantha McLemore since 2009 and consists of 45 stocks. However, it is probably better suited to the stronger-stomached investor, as it is more than 50 per cent higher risk than the FTSE 100 and has a bottom-decile annualised volatility over one, three and five years.
The other US fund, Legg Mason ClearBridge US Large Cap Growth, has a lower risk rating of 103 and consists of 50 holdings.
It is managed by Peter Bourbeau and Scott K Glasser, and boasts a top-quartile annualised volatility, Sharpe ratio and maximum drawdown, which shows the most an investor would have lost if they had bought and sold at the worst possible times, over five years.
While it has outperformed its sector average and Legg Mason Opportunity, it has marginally underperformed its Russell 1000 Growth benchmark over the same time frame.
Performance of fund vs sector and benchmark over 5yrs
Source: FE Analytics
The remaining three funds invest in European stocks and are FP Argonaut European Enhanced Income, FP Argonaut European Alpha and Henderson European Focus.
Managed by Oliver Russ since 2010, the five FE Crown-rated FP Argonaut European Enhanced Income fund has delivered a top quartile return over one, three and five years.
Currently, the 47-stock fund’s largest weighting is in financials at 36.35 per cent, followed by a 17.82 per cent allocation to consumer products, 8.94 per cent to telecom, media & technology and 9.26 per cent to cash.
FP Argonaut European Alpha has fewer holdings with just 31 stocks and, as to be expected, a higher risk score of 128. In contrast, the £347m fund’s largest weighting is in consumer products at 24.5 per cent and its second-biggest holding is in industrials at 19.41 per cent.
Managed by FE Alpha Manager Barry Norris for more than a decade, the fund has outperformed its sector average and benchmark by 92.75 and 108.52 percentage points respectively the manager’s tenure, providing a total return of 203.44 per cent.
Performance of fund vs sector and benchmark over manager tenure
Source: FE Analytics
The final European fund on the list is Henderson European Focus, which is a four FE Crown-rated fund managed by FE Alpha Manager John Bennett and is £471m in size.
Over five years, it has significantly outperformed its sector average in the IA Europe ex UK sector and its FTSE Europe ex UK benchmark. The fund has also achieved a top-decile annualised volatility, Sharpe ratio, max drawdown and alpha ratio over the same time period.
Henderson European Focus currently has 43 holdings and has a clean OCF of 0.85 per cent.
