Do concentrated portfolios work – and what are the risks?
Most concentrated portfolios underperform diversified ones over the longer term. Investors should be cautious when assuming that a hot streak will continue, says Rupert Hargreaves
Nick Train, Terry Smith, James Anderson and Harry Nimmo are among the most celebrated British fund managers. All four built outstanding records in their respective styles by employing a high-conviction investment approach with concentrated portfolios.
What “concentrated” means will vary. It could be 20 larger stocks. It could be as much as 50 if you are looking at riskier small caps. It could be a heavy focus on a particular sector. Regardless, it isn't for the faint of heart, but there are plenty of managers and funds that have outperformed by picking the right basket of businesses.
Warren Buffett, perhaps the most famous investor of all time, has long said that it only takes a handful of “wonderful companies” to beat the market in the long term – although he has also said that most people should simply buy index funds.
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Concentrated portfolios: the hedge fund way
Very concentrated portfolios are common with many top hedge fund managers. Chris Hohn's $50 billion TCI Fund Management owns fewer than ten stocks according to public filings. Visa accounts for nearly 20% of the disclosed portfolio. Bill Ackman's Pershing Square Capital Management, the hedge fund behind the London-listed investment trust of the same name, has just 11 holdings. While the Bill & Melinda Gates Foundation Trust is not a hedge fund, it is also highly concentrated, with 80% of its equity assets in five holdings.
This can result in exceptional returns. London-listed Pershing Square (LSE: PSH) has generated an annualised net asset value (NAV) return of 325%, or 14% over ten years. Other top performers include 3i (LSE: III), whose portfolio is dominated by European discount retailer Action and activist UK small-cap trust Rockwood Strategic (LSE: RKW) with 25 holdings in total. High-flying sector trusts such as Polar Capital Technology (LSE: PCT) are also effectively very concentrated, even if they hold a larger number of stocks.
Yet we can also see many concentrated portfolios go wrong. Take Train's Finsbury Growth Trust (LSE: FGT), which has 85% of NAV in its top-ten holdings. This has had a very poor five years since Train's quality-growth style went out of favour. Smith's Fundsmith Equity has also been notably weak. Scottish Mortgage (LSE: SMT), previously run by Anderson, had a very tough 2022 as its high-conviction growth approach struggled, although it has since improved.
Concentrated portfolios can provide unreliable results
So do concentrated portfolios work on average? Not reliably, according to financial data provider Morningstar. It looked at 5,800 European-domiciled equity funds from 2015 to 2025 and evaluated each fund's “portfolio boldness and diversification by integrating stock, sector, and return-based factors”.
The results showed that “on average, there is little to no meaningful relationship between concentration and returns” and “concentrated funds have a substantially wider spread of outcomes, with fatter tails on both sides”. In other words, while concentration can lead to outperformance, it can also result in underperformance with “similar or greater frequency”. There is also a “higher probability of severe losses”. Highly concentrated funds are also more expensive than diversified funds (and far more than passives), which acted as a further drag on returns.
Ultimately, Morningstar found that low-concentration portfolios outperformed all high-concentration portfolios in all categories over the ten years to the end of 2025. The difference was minimal in emerging markets, but in the global and US sectors, it “amounts to approximately one-tenth of total ten-year returns, which is financially meaningful”. In short, managers who consistently outperform with a high-conviction portfolio are rare. So investors should be cautious when assuming that a hot streak will continue.
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