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Fri, Jun 16, 2000
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Watch Out For 'Portfolio Overlap'
By Chet Currier  Associated Press
NEW YORK — There you are, casually scanning the portfolio holdings of a mutual fund in which you have just invested, when the sight of a couple of familiar stocks gives you a little jolt.

These guys own big positions in Sugarwater Industries and Orinoco.com? Gosh, so do the two other funds I own. I thought I was diversifying, spreading out my risks, but with these stocks I'm just buying more of the same thing!

So goes your introduction to a nagging problem in the world of fund investing. Call it duplication, redundancy, or portfolio overlap — whatever name you put on it, you find yourself effectively paying two or three or more funds to own the same stock in your behalf.

These days, overlap can be especially common, given that a few dozen elite stocks have been hogging most of the glory in an extremely selective market. With hundreds of stock-fund managers trying to stay on top of this trend, many of them naturally gravitate toward the same stocks. After all, that's where the money is.

So you can very easily wind up in a spot described by Olivia Barbee, managing editor of the monthly Morningstar FundInvestor newsletter: Your funds come in different wrappers, but the contents may be all too similar.

If you pay no attention to it, this pitfall can defeat the purpose of your diversification efforts: To keep you from being too concentrated in any given stock or sector of the market.

Fortunately, though, there are several things you can do to overcome overlap, or at least minimize it as a factor in your financial life. They range from simple, rule-of-thumb principles a casual investor can keep in mind, to more elaborate measures suitable for activists willing to invest hours in front of a computer screen.

Ms. Barbee's first suggestion: "Avoid funds run by the same manager. Zebras don't change their stripes, and managers rarely change their strategies. If you own two funds by Famous Manager A, chances are you own two of the same thing."

And her second idea: Don't load up too much on funds from any one "boutique" firm. "Janus is a growth specialist. Oakmark means absolute value. Such fund families are excellent at what they do, but it's questionable whether owning three of their funds gives you anything you won't get with one."

Spreading your money among different fund families can make a lot of sense on general diversification grounds. It helps ensure that you are hiring managers with truly different viewpoints.

Doing this may increase your paperwork burden, but it's likely to be worth the trouble. If you invest through a broker or financial firm's fund marketplace, you may be able to keep most or all of a widely diversified investment program in the handy confines of just one or two accounts.

Also, pay regular attention to the investment styles of funds you own or are thinking about buying. If you buy funds straight from the top of the most recent performance lists without regard to style or category, chances are you are going to own several versions of the same thing (which may well be as out of favor next year as it is popular now).

In the ideal, if you own half a dozen stock funds, some will be domestic, but maybe one or two will be international; some will emphasize big stocks, and others small stocks; some will follow a growth philosophy, and others a value strategy.

Much better, in most cases, to own a little from each style category than to try to figure out which type will prosper most in the next year or two, and then bet accordingly. Funds, after all, are designed to take the "betting" out of investing.

More from Ms. Barbee: "Scrutinize sector weightings. If two funds from the same category sport similar sector weightings, they may own many of the same stocks."

For the truly energetic, Ms. Barbee suggests, "Compare the stocks in your funds' portfolios. Those who have the time and the inclination can enter all of their funds' holdings into a spreadsheet and sort by stock name." Morningstar and other fund research firms sell software products that can simplify the job, if you prefer putting money rather than time into the project.

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