Asset managers often include a fund’s top 10 holdings and sector positioning on various marketing and information materials. There are many approaches as to how much or little information is displayed, which often depends on the targeted audience. 
Professional investors generally want more detail and want to know how the fund is positioned relative to its benchmark. For a non-professional investor, relative positioning will mean very little, or even nothing at all.
For high conviction, long term, buy and hold approaches, displaying a fund’s top 10 holdings can be useful as they can have a significant impact performance.
In addition, investors get a better understanding of where their money is invested, as they may have heard of some of the underlying holdings, although they will not necessarily know the manager’s investment thesis. In contrast, displaying the top 10 portfolio holdings can also be completely meaningless. Funds with a very diverse portfolio, those that are equally weighted or even those that operate with a high level of turnover are less likely to have their returns impacted by the top 10.
Sector breakdown, both in absolute terms and relative to a benchmark, again, tends to be more useful for professional investors and will make very little to sense to a non-professional investor who is unlikely to understand the composition of a sector.
An obvious example of this would be technology, where it could be argued that many of the companies that reside within the sector are not necessarily technology businesses in their purest form. Technology companies have an array of business drivers that make them far more diversified than the sector classification may lead the untrained investor to believe. Whilst sector breakdowns have their limitations, they do allow investors to compare fund exposures on a like for like basis, with the caveat of such misclassification issues.
We, and the financial regulator, generally favour transparency from asset managers. Some asset managers go as far as to publish their full portfolio holdings with a slight delay, which, in theory, is positive as it allows investors to see exactly where their money is being invested. But transparency has not always worked in their favour. There have, historically, been instances where the openness of this approach has fallen foul of others in the market, who have used the transparency to take advantage of a fund’s biases. An example of this would be a hedge fund short selling a fund’s holdings in a well-publicised period of outflows.
Whilst we have discussed some of the nuances with the top ten holdings and sector positioning, a crucial takeaway is that these two areas can highlight significant exposure to a certain area of investment that investors may not have been aware of if they were not displayed. It takes a trained eye to spot the risks associated with such exposures, and we therefore question if these risks could be highlighted to investors in an easier to understand manner, through other mediums.
Daniel Pereira is investment research analyst at Square Mile Investment Consulting and Research. The views expressed above are his own and should not be taken as investment advice.