In the wake of the (JAVLX) Janus Twenty fund's popularity, there are now more than 20 funds bearing that number in their name. But you might want to scalp your ticket for this bandwagon.
How to Build a Diversified Portfolio
I Own What?! Who Still Loves Tech, and Who Doesn't
10 Questions With Janus Global Value's Jason Yee
Janus launched its Twenty fund back in ye olde 1985. Thanks to stellar returns throughout the 1990s, it ranks among the nation's largest stock funds, with more than $17 billion in its coffers -- despite having closed to new investors back in 1993. The idea behind the so-called focused fund is that it holds only 20 or so stocks, which are billed as the portfolio manager's best ideas. The average U.S. stock fund has 145 stocks in its portfolio, according to Chicago fund-tracker Morningstar.
There are now 23 funds that are at least a year old and have the magic number in their name. Hoping to replicate Janus' marketing success, competitors have launched 22 of those since 1995 in what some would call classic "me too" marketing.
But beyond the label lies a harsh investing reality: Big bets on fewer stocks mean higher highs and lower lows -- not better returns. Shareholders of these funds have seen plenty of lows and precious few highs recently, which is why funds that bet on a sector or a limited roster of stocks should make up only a modest part of your portfolio.
"You get greater volatility with these funds because they're very, very different from the index," says Russ Kinnel, Morningstar's director of research. "I think with these sorts of funds you can really hurt yourself in a short time period."
That's been borne out over the past 12 months. Over that stretch the average "20" fund is down 48%, compared with a 25% tumble for the
, according to Morningstar. More than half of these funds trail at least 75% of their peers over the past year; just eight have been around for three years.
Keep in mind that some funds using the focused approach are working, and that not all focused funds put their target number of holdings in their name. Among the price-conscious value-fund ranks, there's the
Oakmark Select fund, where manager Bill Nygren holds his favorite 20 stocks. The fund trounced the S&P 500 and 99% of its peers over the past three years. Nygren has also managed to be consistent, beating his average competitor in each of the past four years.
The Oakmark Select fund got so popular that it closed to new investors this year, but the team-managed
Clipper fund, which held 27 stocks at the end of June, beat the S&P 500 and more than 90% of its peers over the past one, three, five and 10 years.
The Janus Twenty fund has suffered along with its imitators, though like many of them it actually owns more than 20 stocks. In 1998 and 1999 manager Scott Schoelzel rang up outsize gains of 73% and 65%, respectively. But over the past 12 months, the fund has lost more than half its value; its 2.2% three-year annualized gain lags behind more than 70% of its large-cap growth peers.
Others have fared worse, particularly those funds that stash more than half of their money in the ravaged tech sector. The tech-heavy
Merrill Lynch Focus Twenty funds, for instance, have lost more than 80% of their value over the past year. The
Turner Top 20 fund, another tech-laden portfolio, is down 67% over 12 months.
Many fund shops may have launched these funds figuring they could just replicate the core of their existing diversified funds. Turns out that running a focused fund is different from managing one that doesn't rely as heavily on a short menu of stocks.
"With fewer holdings, you need
stock picks that you have more confidence in and a long-term focus," says Kinnel. "Some managers can make a good case for why they should run a focused fund and not a diversified fund, but not everyone."
Of course, it's natural that the past 18 months' tech-led losses have hit funds hard, given their risky and mainly tech-centric ways. That's why the top and bottom performers are routinely littered with sector-specific or focused stock funds and also why they should be limited to about 10% of an investor's diversified portfolio.
On average, the five biggest "20" funds have about 40% of their money in tech and telecom stocks and fell more than 40% in the year ended July 31, according to Morningstar.
If we toss those funds into a pot and sift out their cumulative top-five stock picks, the best of their best ideas, we find an eclectic and battered bunch:
AOL Time Warner
. Pfizer and Citigroup are beating the S&P 500, losing 4.5% and 19.5% over the past year, respectively. But the other picks' losses are steeper, and the five stocks together are down more than 40% over the past 12 months -- just like the funds that own them.
And Jim Oelschlager's
Pin Oak Aggressive Stock fund, which holds about 25 stocks and has had up to 80% of its money in tech stocks, managed to beat its peers in 1999's froth and last year's tumble, before falling 49% this year.
The bottom line is that fewer holdings and bigger bets seemed like a great idea during the frothy days in the second half of the 1990s, but now investors are discovering that higher highs naturally presage lower lows.
And with only five of these funds gathering more than $100 million in assets, fund companies are being reminded of the time-tested law that a catchy label alone won't sell a fund.
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
firstname.lastname@example.org, but he cannot give specific financial advice.