Can Investing in Many Funds in One Family Become Too Close for Comfort?

Is there greater risk in having most of your money with one fund family, or should you spread it around?

-- David Campbell

David,

Similar physical characteristics and personality traits invariably show up in a family. I, for example, come from a family of skeptics.

A family of mutual funds, of course, won't have the same laugh or the same nose. But a firm's funds will often resemble one another.

Sometimes, the similarities are on a relatively macro level. Fund firms often specialize in single style of management (say growth or value, quant or fundamental analysis). A family may wind up with funds owning similar stocks or carrying heavy weightings in the same sectors.

"You should go under the impression that they are not giving you diversification," trumpets Robert Levitt, a financial adviser with Levitt Novakoff & Co. in Boca Raton, Fla. "If you put all your money in one style, that might increase your returns in one year if you guess right. But it also increases your risk."

Similarities can extend beyond style to individual stocks. Be particularly conscious of redundancy when examining similar funds from the same complex. If you are looking at all large-cap funds, "make sure you are not overweighting yourself in any one stock," says Ron Roge of R.W. Roge & Co. in Bohemia, N.Y.

I took a look at three funds from Janus, a shop known for its growth approach.

Rummaging through the top-10 holdings of the (JANSX)Janus fund, (JAVLX)Janus Twenty and (JAMRX)Janus Mercury -- all categorized as large growth funds by Morningstar -- I found much of the same inventory.

At the end of last year, all three funds owned good chunks of Cisco (CSCO), Microsoft (MSFT), Pfizer (PFE) and Time Warner(TWX). The Janus fund and Mercury were both holding Comcast(CMCSA). Also, Twenty and Mercury both owned Nokia (NOKA) and America Online(AOL).

Suffice it to say that if you owned these three funds and nothing else, your money would be concentrated in a relatively short list of stocks; you may be less diversified than you realize. (Yep, there's that D word again.)

Janus is by no means the only firm where such redundancy exists. About a month ago, we reported on the repetition in six Fidelity funds, and TSC columnists Steven Syre and Steve Bailey noticed the similarities as well.

How does this overlap happen? Well, fund managers often aren't lone gunslingers. For one, a fund company may employ a team of analysts from which the managers draw their ideas. A firm's managers may also rely on group discussions to generate stock suggestions.

Research Redundancy

When you are out shopping for new funds or reevaluating your existing portfolio, you should first examine the industry weightings of each portfolio, says Levitt. "You want to have money in various sectors." If your funds each have large allocations to technology and pharmaceuticals, as examples, then you may not be getting needed diversification of risk.

You should also take a look at each fund's top holdings. "I think the top-10 holdings is enough. You get a good flavor of what the manager is doing," says William Dougherty of Boston consultant Kanon Bloch Carre. Any visible overlap in the largest stocks should be a red flag that you might be too concentrated in few names.

The Exceptions

Despite the above illustrations, investing exclusively with one family may not result in duplication in your portfolio. If you are buying an equity fund, a bond fund and an international fund from one firm, there is a much slimmer chance of any redundancy.

"Overlap is not as big of an issue as you think if you stick to the top-20 families," says Dougherty. "These families have become so big and have so many offerings. The style of the fund company might be value, but that doesn't mean they don't have growth funds."

Still, be careful when "diversifying" within a single fund complex. The complex may offer various styles, but you may want to seek out different firms for their own specialties. "There is something to be said that some managers tend to be best at one specific thing. You might want to go to different firms for various areas of expertise," says Levitt.

A tip from my editor, David Landis: If you are investing in one family to merely avoid receiving multiple statements, then you may want to think about investing through a fund supermarket, like Charles Schwab.

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