I came across an article on Yahoo! Finance last week that profiled the Fidelity Advisor Mid Cap Fund (the fund is only available in the U.S.). The author led off with a quote from the fund’s manager: “The way I describe my investment philosophy is basically this: I believe high conviction in my top performers can result in outperformance.”

We couldn’t agree more with this statement at Steadyhand. Our investment philosophy is based on four key principles, one of which is that a fund’s assets should be concentrated in its portfolio manager’s best ideas. We believe that a fund with a vast number of holdings stands little chance of outperforming the market, and that managers who concentrate their fund’s holdings also concentrate their research efforts and are less distracted by the ‘noise’ that permeates the market. As the big guy here puts it, “I don’t want my money in the manager’s 80th best idea, I want it in their top 20-30.”

Turning back to the Fidelity fund, the manager goes on to say: “My top 20 will drive performance.” Again, just what we’re looking for. The manager’s focused approach has worked well for unitholders. Although the fund is only 6 years old, its 3 and 5-year returns have added significant value over both its peers and the overall market.

Another aspect I like about the fund is that it’s closed to new investors. This is an acknowledgement by the manager (and Fidelity) that asset bloat prohibits the fund from effectively pursuing its strategy.

However, with roughly $US 12.4 billion in assets, the manager may already be feeling “bloated” (note that the largest mutual fund in Canada, Investors Dividend, has roughly $CDN 14 billion in assets). Perhaps this also explains why the fund holds over 70 stocks. There’s no doubt that the manager has conviction in his top 20 holdings, and he acknowledges that these holdings largely drive performance, but why the extra 50+ names? Maybe the fund has simply become too big to concentrate on the manager’s best ideas. After all, it has a mid-cap focus, where capacity and liquidity can be an issue. In any event, the manager’s investment philosophy is right on the money in our view – a focused approach is the way to go. And kudos for capping the fund.

We take this approach one step further at Steadyhand. Our equity funds hold between 15-35 securities, and we intend to cap our funds if our managers feel they no longer have the agility needed to pursue opportunities in their “sweet spot.” For our Small-Cap Equity Fund, this means we’ll close the door when it hits $125-150 million in assets. And while our other funds have a lot more capacity, we can assure you that we won’t let them become bloated. It’s not a good look.