Mutual funds are a popular investment choice because they are convenient and can offer diversification. But can a portfolio that appears diversified actually be concentrated? This article looks at an example portfolio and the source's lesson about hidden overlap.
A portfolio overview
At first glance, this portfolio looks good: its total return is positive at 5.86%. But does that attractive number tell the whole story, or is something hidden underneath?
The portfolio's total return
A 5.86% return is only an overall snapshot and can be easy to overinterpret. To understand a portfolio, look more closely at its holdings and how the return was measured.
A first look at diversification
The portfolio invests in five mutual funds. On the surface, that may look diversified because the funds include global equities, technology stocks, China stocks, and gold.
Looking inside the funds and their weights
Now consider the composition and allocation of each fund. This is where the source says the picture becomes more interesting.
Three core funds
The source says that more than 80% of the portfolio's total value is concentrated in three core funds: SCBNDQA, SCB World A, and Meg A.
Exposure to U.S. stocks
Looking through to the funds' holdings, the source says the portfolio has heavy exposure to one region: U.S. stocks, which account for 74.4% of the whole portfolio.
Why the portfolio is concentrated
How can a portfolio with five funds end up concentrated in U.S. stocks? The source attributes it to overlap among the funds.
How the funds combine
The source says SCB NDQA and Meg A mainly invest in U.S. stocks. SCB World A sounds globally diversified, but the source says 71.58% of it is also invested in U.S. stocks. Fund names alone do not show how holdings overlap.
Key lessons for investors
After looking through the example, what lessons does the source draw?
What real diversification means
The portfolio initially looks varied because it holds five funds. But the source says almost 75% of the example is weighted toward U.S. stocks. The key lesson is that diversification is not simply the number of funds; it depends on the assets held inside each fund.
- A portfolio may look diversified but still be concentrated.
- A positive total return does not tell you everything.
- Diversification depends on underlying assets, not just the number of funds.
- Different funds may hold overlapping assets, creating concentration.
- Look through a fund's holdings to assess its risks.
This example raises a question worth checking in your own portfolio: could your investments contain similar overlap that you have not examined?
Data limitation: The figures above describe the source's example portfolio. Fund holdings and allocations change over time; check each fund's latest Fund Fact Sheet before drawing conclusions. The source article does not give a holdings date for these percentages.
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