In the current benign volatility environment, it is useful to look at sector concentration.
It’s no secret that market volatility has been trending downward significantly. In fact, as of June 30, 2017, the 12-month standard deviation of the S&P 500 reached 6.06%. You have to go back to 2007 to find a level lower than that. Reasons to explain this phenomenon abound, ranging from continuing quantitative easing across the globe to significant reduction in political risk after Brexit, President Donald Trump’s election last year, and the recent failure of populist candidates to access the French presidency.
Managers Nick Kaiser and Scott Klimo look for stocks that have good growth prospects and which also satisfy Islamic investing principles. This incurs several investment exclusions and recommendations. The most notable feature of this fund’s portfolio is its lack of financials stocks, which are excluded by Islamic law’s prohibition on paying or receiving interest. The fund, which has a Morningstar Analyst Rating of Bronze, also has no basic materials, real estate, telecom, energy, or utilities stocks because they typically sport high debt loads, and the fund can’t hold stocks with a debt/market-cap ratio greater than 30%.These investing principles, combined with the quest for growth, naturally lead the portfolio toward technology stocks. As of May 31, these accounted for 45.7% of the fund’s assets, versus 29.1% for the U.S. large-growth Morningstar Category average, and 29.0% for the Russell 1000 Growth benchmark. Akre Focus
Lead manager Chuck Akre and comanagers Tom Saberhagen and John Neff run this fund in a decisive, high-conviction manner. Stock selection focuses on companies that the managers think can grow their capital over the long term. These companies tend to have sustainable competitive advantages and high free cash flow, strong management, and the ability to reinvest cash at superior rates of return. In keeping with its stringent selection criteria, the portfolio is concentrated across 20-30 stocks and displays significant sector concentration risk.As of April 30, 2017, Akre Focus’ exposure to financial-services stocks was 42.5%, compared with 12.3% for the large-growth category average and only 6.0% for the Russell 1000 Growth Index. Four out of the fund’s top five holdings were in this sector, constituting almost 35% of assets. While investors face significant security-specific and sector risk here, this Silver-rated fund has proved over the long haul to be an excellent judge of businesses and the people who run them. Polen Growth
The Bronze-rated fund epitomizes Polen Capital’s approach to asset management, which aims to identify high-quality firms with strong earnings potential, abundant free cash flow, low debt levels, and high and sustainable returns on equity. The managers here typically won’t own cyclical and capital-intensive firms. The resulting portfolio is concentrated at approximately 20 stocks.As of March 31, 2017, Polen Growth’s exposure to technology was 37.4%, versus 28.9% for the average large-growth fund and 27.9% for the Russell 1000 Growth Index. Yet, this fund’s quality bias was evidenced by its 70.3% exposure to stocks with Morningstar Economic Moat Ratings of wide versus 56.5% for the category and the index.
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