By Scott Ronalds

If you drive by 3rd & Burrard in Vancouver, you’ll sometimes hear a loud reverberating sound coming from a stand-alone building nestled between the car dealerships and art galleries. Don’t be alarmed. It’s just us screaming our investment philosophy and industry observations from the rooftop. Some of our neighbours (and competitors) find it annoying, while other observers find it refreshing. We simply find it necessary, if not a little therapeutic, in this crowded landscape.

Today the bullhorn is pitching the virtues of concentration – a key tenet of our philosophy. We believe that by focusing on a limited number of stocks (20-30), portfolio managers have a much greater understanding of the businesses in which they invest and a higher level of conviction in their best ideas. A fund with a vast number of holdings stands little chance of outperforming the market, as it runs the risk of simply mimicking it. Perhaps Warren Buffett said it best, "Wide diversification is only required when investors do not understand what they are doing."

Concentrated investing isn’t for everybody. There will be periods when our funds move in cycles of their own and will be out-of-synch with the index. This can feel lonely at times, but if you are seeking to beat the index over the long run, you need to ignore it over the short term. You need to be concentrated.

Morningstar (USA) published an interesting piece the other week on the topic (Focused Foreign Funds Are in an Exclusive Club). They report that most funds don’t follow a concentrated approach: “Just over one third of actively managed domestic [U.S.] core funds held fewer than 50 stocks recently.” Further, they found that only 6% of foreign (large-cap) funds held fewer than 50 stocks.

How have those concentrated foreign funds fared? Quite well. According to the author, a much higher proportion of ‘focused’ funds produced top quartile returns than their less-focused counterparts over the past 10 years.

Our equity funds are among the most concentrated of their kind. Our Small-Cap Equity Fund currently holds 17 stocks, our Equity Fund holds 25, and our Global Equity Fund holds 39. One thing you’re assured of at Steadyhand is concentration.