If less was more a few years ago, it certainly seems like it's less again.

Other Junk

Jan. Cash Flows to Funds Set Dubious Record

The Low-Maintenance Portfolio

The Trouble With Tech Funds

Former Tech Glutton Janus Turns Finicky

Addicted to Sector Funds

The Junkie's Perfect Fund Portfolio

The most fundamental reason for owning a mutual fund is that it conveniently and cheaply spreads your money across a broad portfolio of stocks -- the average U.S. stock fund holds some 140 stocks, according to

Morningstar

. But the frothy, tech-led bull market of the late 1990s warped this idea. The market didn't tumble too often during its northward climb, so diversification just seemed like a drag on returns, not a way to reduce risk. Funds like

(JAVLX)

Janus Twenty that kept their holdings lists short and their tech bets high roared ahead of more diversified growth funds. As a result, investors and fund companies came down with focused-fund fever -- lest we forget, Janus Twenty, with some $25 billion in its coffers, is closed to new investors.

It makes sense that we got comfortable with inordinate risks during a period of inordinate returns. After all, the

S&P 500

posted five straight years of at least 20% gains for the first time ever from 1995 through 1999. But as we approach the one-year anniversary of the tech-laden

Nasdaq Composite's

March 10 peak -- and that benchmark is at two-year lows -- let's take a look at how these home-run funds are holding up. As you might expect, those muted voices that predicted a steep drops to match these funds' steep gains are ringing true.

The upshot is that these funds' current woes aren't necessarily reason to dump them, but if you're aiming for a diversified portfolio, their current tumbles show why you should probably view them as sector funds and limit them to around 10% of your stock portfolio.

"Concentration will pay off big when it works, but be prepared for the other side too," says Phil Edwards, managing director at

Standard & Poor's

fund research unit. "It's not a bad thing or a good thing, but it's something you need to understand when you're building your portfolio."

It's not easy to single out focused funds. Despite their popularity, they don't have their own category, even though they're high-octane styles typically make them a distinct from their "peers." Since they often have big bets on relatively few stocks, they tend to stick with big-caps that they can trade more easily than less liquid small- or mid-caps.

To pull together a representative bunch, I sifted the big-cap growth fund bin for funds with more than $100 million that launched since 1995. Then I sifted that pack for funds with 30 or fewer holdings. I also trolled for funds with "focus," "20," or "twenty" in their names and invested as advertised. This left me with 14 big-cap growth funds to use as a benchmark.

They hold some 30 stocks each, on average, and have more than 55% of their money in tech stocks, according to Morningstar. As you might imagine, carrying a portfolio with big bets in the tech sector hasn't been a positive experience lately. These funds are down 16.5% this year and have lost almost a third of their value over the past 12 months, on average. This compares with a 5% and 6.3% loss for the S&P 500 over the same periods.

Only one fund on this list, the no-load

(TEQUX)

Transamerica Premier Equity fund co-managed by Jeff Van Harte and Gary Rolle, has managed to beat its average peer this year and over the past 12 months.

There are a lot of marquee funds and managers on this list. There's the broker-sold

(MAFOX) - Get Report

Merrill Lynch Focus 20 fund run by former

PBHG

star Jim McCall and his old fund, the no-load

(PLCPX) - Get Report

PBHG Large-Cap 20, which now has Michael Sutton in charge.

And of course there's a real

Janus

flavor here. There's Janus Twenty and the broker-sold

(JCGAX)

ASAF Janus Capital Growth, both run by Scott Schoelzel, as well as the no-load

(MFOCX) - Get Report

Marsico Focus fund and the broker-sold

(NFEAX) - Get Report

Nations Marsico Focused Equity fund, where former Janus Twenty manager Tom Marscio calls the shots.

These funds' recent losses tell you that they're risky. A look at these funds' cumulative top-10 holdings hammers that point home even harder. If I tossed these funds' portfolios in a pot and sifted out their cumulative top-ten holdings I'd be looking at a tech-heavy, battered list. Nine of these companies have tech or telecommunications labels and only two of these stocks have risen over the past 12 months,

Citigroup

(C) - Get Report

and

AOL Time Warner

(AOL)

.

In sum, these 10 stocks have lost about a third of their value over the past year.

Beyond these concentration risks, there are other needling pitfalls. One is manager turnover. Fund shops tend to give these portfolios to their top guns. That means you're getting the best ideas of the manager who's supposedly the best at a given firm. That also means you're casting your lot with the person everyone wants to hire. Witness McCall's departure from PBHG and Marsico's decision to leave Janus and found his own shop. Neither of their old funds has changed styles, but Marsico's Focus fund has weathered the past year's storm better than his old charge, Janus Twenty, and also sports a higher three-year annualized return.

Another risk is asset bloat. This isn't typically a problem in big-cap funds because large-cap stocks are so liquid. But when a fund gets a mountain of money and stuffs it into precious few stocks, those positions end up being big and unwieldy. Consider that the Janus Twenty fund had some 12% of its $25 billion sunk into server king

Sun Microsystems'

(SUNW) - Get Report

shares at the end of October, the fund's most recent portfolio report to Morningstar. That equates to a more than 1% stake in the entire company and a position of more than $3 billion. Selling that stake would take quite some time. Perhaps that's why the Twenty fund owned almost 40 stocks at the end of October.

On the other hand, there are still benefits to concentrated investing that shouldn't be ignored. Don't forget, when you force a portfolio manager to slim down his or her list of holdings, you do whittle away some chaff. We've mocked "best ideas" portfolios, but it's natural to be drawn to the pragmatism of this idea.

"The benefit is that you really do get the managers' best ideas," says Standard and Poor's Edwards. "There's a lot to be said for that, as long as you understand the risks."

Keep in mind, value funds have had success with a concentrated approach. The no-load

(OAKLX) - Get Report

Oakmark Select fund and the no-load

(CFIMX) - Get Report

Clipper fund routinely trounce their peers and carried just 20 and 32 stocks as of their most recent portfolio reports.

Once you understand the risks of focused investing, the idea is to control them. That's accomplished by exposing yourself to these higher-octane strategies in smaller doses. It's probably a good idea rule of thumb to view focused funds as if they were sector portfolios. These typically get about a 10% weighting in diversified portfolios, but Edwards argues that they aren't quite as risky as sector funds since they do have their money in different sectors.

Indeed, an S&P 500-like portfolio with a 20% weighting in Janus Twenty would've beaten the S&P 500 over the past three-, five- and 10-year periods, according to Morningstar.

How You Would Have Done

Of course, over the past year and during market troughs, Janus Twenty would've held the portfolio back. That's the price you pay for adding even a modest dollop of concentration to your portfolio. It also shows why funds with fewer stocks probably deserve less of your money.

The Junk Pile

If you had any lingering doubts about growth funds' reliance on the tech sector, you can put them to bed. Over the last week, tech funds were the worst-performing fund category with a 14.9% loss, according to Lipper. The three worst-performing diversified fund categories were mid-cap growth funds, all-cap growth funds, and big-cap growth funds, which lost 9.1%, 8.8%, and 8.5%, respectively. Apparently, focused funds aren't the only growth fare that gets a cold when the tech sector gets pneumonia.

Fund Junkie runs every Monday, Wednesday and Friday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

imcdonald@thestreet.com, but he cannot give specific financial advice.