By Adrian Mastracci, KCM Wealth
Special to the Financial Independence Hub
“Many portfolios are overloaded with same or similar investments. Few investors know about overlap.”
A frequent investing theme is owning more than 15 different mutual funds:
purchased over the years with little thought as to how the collection fits together, if at all.
Owning several funds can create a significant “overlap” of securities.
That is, individual holdings within the mutual funds are often the same, or very similar.
While fund names may differ, their holdings do not.
For example, mutual funds buy from a short list of Canadian stocks, like banks.
Having several accounts can also have you owning many of the same stocks in each.
This may tilt your portfolio in one or more asset type or sector. However, you hardly see anything written about portfolio overlap. Most investors have little or no knowledge of the implications of overlap, such as:
• Owning a collection of funds heavy on overlap reduces your portfolio diversification.
• Overlap increases if you choose funds from similar investing styles and sectors.
• Portfolios that overindulge on overlap can also be affected in their long-term results.
Some portfolios have more than 40% overlap.
Problems can arise with as little as 10% overlap.
Think of your overlap in this fashion:
|Overlap Factor||Overlap Range||Portfolio Implications|
|Low||Under 10%||Little required|
|Noticeable||10% to 20%||Needs tweaks|
|Medium||20% to 30%||Cracks showing|
|High||30% to 40%||Serious problems|
|Excessive||Over 40%||Start fresh|
Here are five ways to reduce the impact of portfolio overlap:
• Focus on broad portfolio diversification to attain the least duplication.
Start by analyzing stock duplications in your mutual funds’ top holdings.
• Set asset mix targets suitable for your goals and invest within them.
Something few investors have or follow.
• Be careful when buying funds from the same manager or provider.
This is when portfolio overlap could reach its highest levels.
• Invest in Exchange Traded Funds (ETFs) and index funds.
Up to 10 ETFs with low or no overlap should suffice to populate asset mix.
• Reduce your number of investing accounts to a minimum.
Then concentrate on how well the investment selections mesh together.
Probe the overlap factors affecting your nest egg.
Try to keep duplicate and similar holdings as low as possible.
Limiting overlap reduces risks in your portfolio.
You can’t avoid all overlap as many funds invest in the same companies.
Your goal is to minimize overlap, not eliminate it.
Don’t allow undesirable consequences of overlap to shortchange your portfolio.
You may need to consult an investment professional.
Adrian Mastracci, MBA, is president and portfolio manager for Vancouver-based KCM Wealth Management Inc., specializing in designing and stewarding retirement portfolios.