Concentrated international share funds were more likely to generate excess returns than their more diversified peers over the 12 months to 30 September 2016, according to Zenith Investment Partners.
The firm’s most recent International Shares Sector Review found 70 per cent of concentrated funds outperformed the MSCI world ex-Australia index, compared with only 55 per cent of funds with greater diversification.
Concentrated funds also demonstrated less performance volatility, said Zenith senior investment analyst Quan Nguyen.
“The generally accepted drawback of concentrated funds is that there will be a higher degree of performance volatility, especially over shorter periods of assessment,” he said.
“However, Zenith has found that this was not necessarily the case – in fact, the volatility of the concentrated funds was marginally lower than that of the more diversified funds over the long-term.”
Zenith said such funds were attractive as they typically “contain only a manager’s best ideas” and can benefit from their benchmark-unaware construction, but cautioned investors to use such funds as part of a broader portfolio.
“Whilst on average, concentrated funds have performed better, the difference between the best and worst can be significant,” said Mr Nguyen
“As a result, Zenith continues to advocate the use of concentrated funds as part of a diversified International Shares portfolio rather than as a standalone allocation.”