Sometimes it pays to be picky. So Westcore, a Denver-based, no-load fund sponsor, demonstrates with Westcore Select, a fund that holds a relatively small number of stocks.
Over the past year, Select has run rings around the competition. Through October 20, Select (symbol WTSLX) gained 16%, making it the best performer over that period among funds that specialize in fast-growing, midsize companies, according to Morningstar. Select has also clobbered its more-diversified sibling, Westcore Midco Growth (WTMGX), which gained 7% over the past year.
Will Chester, who has been involved with Midco Growth since 1986, took over management of Select in 2001. He leads a team of eight portfolio managers and analysts who pick stocks for both funds. They look for stocks of companies that generate high returns on equity and are capable of generating annual earnings growth of at least 15%. Midco Growth holds about 70 stocks. Chester chooses 20 to 35 of the best ideas for Select.
In theory, so-called focused funds should perform better than a similarly run diversified fund because the former contains a manager's best ideas. Chester, for example, added Tempur-Pedic International (TPX), the maker of popular foam mattresses, to Select at the end of 2005 as Midco Growth was expanding its tiny stake. A 60% surge this year in Tempur-Pedic shares has had a much greater impact on Select than on Midco Growth because the stock represents 5% of Select's portfolio but less than 1% of Midco Growth's.
Although Select holds a relatively small number of stocks, its holdings are well-diversified by industry, says Chester. Still, focused funds are almost always more volatile than general funds and are subject to bigger declines if a major holding takes it on the chin. Oddly, Select has been less volatile than Midco Growth over the past three and five years. Don't count on that state of affairs to continue indefinitely. If you're averse to risk, stick with a more-diversified fund. If you like thrills, a fund like Westcore Select may be up your alley.