Question: My portfolio is well-diversified in terms of the allocation to different types of equity funds, but how can I be sure they aren't all investing in the same stocks?
Answer: You raise an important point about using multiple funds within an investment portfolio. Although investors who put their money in only stocks can easily tell what percentage of the portfolio each stock represents, those who own stocks through funds, investment trusts and ETFs often have a tougher time. That's because these three types of funds can hold hundreds of stocks at once, and investors might pay little attention to what the funds' underlying holdings are as long as the fund categories seem to suggest a well-diversified portfolio.
The danger, of course, is that you could unwittingly build up an uncomfortably large position in a single stock simply by owning various funds that are invested in it. For example, let's say your portfolio consisted of a FTSE 100 index fund such as Vanguard FTSE 100 ETF (VUKE) as a core holding (for our example we'll say it represents 50% of the portfolio), Schroder UK Alpha Plus for its exposure to active management (30%), and Henderson Global Financials to add some global flavour and additional exposure to the financials sector (20%).
On the surface, one might expect to see little overlap between these three investment choices. But look under the hood, and you'll find there is significant overlap among some of the companies the funds own. In particular, banks HSBC (HSBA), Lloyds Banking Group (LLOY) and Barclays (BARC) would represent nearly 10% of the total portfolio. That's not to say that these aren't good stocks, but whether you want to devote such a large portion of your portfolio to them is a different matter.
Looking at Your Portfolio's Underlying Holdings
How can you find out where these stock overlaps exist in your portfolio? You could spend hours poring over portfolio listings from your funds' latest annual reports, but you probably have better things to do with your time. Fortunately, Morningstar's portfolio X-Ray tool allows you to do so with just a few mouse clicks.
You can gain access to the X-Ray tool through Portfolio Manager (X-Ray only available to Premium Members). You will see a dropdown menu near the top of the tool that contains a Holding Overlap option. Click on it, and you'll find an aggregate list of the underlying stock holdings for all the funds in the portfolio. If three different funds in the portfolio each own a stock, the Overlap page will show you how much your total allocation to the stock is worth and what percentage of the portfolio's net assets it represents.
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Identifying Places to Scale Back
The tool also shows you which funds are providing exposure to which stocks and how much each position is worth. This can come in handy if you decide you want to reduce your exposure and are wondering where to cut back. You can also see what percentage of a fund's portfolio the stock represents, which gives you some idea of whether it's a major holding or just a small piece of the pie.
The Holding Overlap feature is particularly useful to investors concerned that they might be over-allocated to a specific company or group of companies through their funds. It can also come in handy if you own individual stocks as well as funds; before adding an individual stock position, make sure that it's not already prominent in your portfolio as a result of the funds you own.
Checking Holding Overlap can also help investors get a better idea of what they actually own. After all, equity funds are really just baskets of stocks, and it's the performance of those stocks that determines the performance of your portfolio.
As a fund investor, it's easy to become complacent and focus primarily on details about the fund, including its manager, strategy, performance and so forth. Those things are important, to be sure, but as the manager of your own personal investment portfolio, which likely includes multiple funds, investment trusts, ETFs and/or stocks, it's up to you (or your adviser, if you have one) to be aware of any duplication that might be happening across your investments. The Holding Overlap tool is a great way to do this.
Holly Cook contributed to this article.
