Minimize portfolio overlap

Adrian Mastracci, Senior Portfolio Manager at Lycos Asset Management

Many portfolios that I review are overloaded with similar investments. A frequent investing theme is to own more than a dozen mutual funds. Often purchased over several years with little thought as to how the collection fits together, if at all. My observation is that owning several funds can easily result in significant “portfolio overlap“. That is, individual holdings within the funds are often the same, or quite similar.

While fund names differ, their holdings may not. For example, mutual fund managers select from a short list of bank stocks. Managing several investment accounts can also result in owning many of the same or similar stocks in each. This may tilt your total portfolio toward one or more asset type or sector.

Understand Overlap

I highlight what can happen:

1. Owning a collection of funds heavy on overlap reduces portfolio diversification.
2. Overlap increases if you choose funds from similar investing styles and sectors.
3. Overindulging on portfolio overlap can affect your long-term results.

Some portfolios were sporting more than 40% overlap. I’ve seen issues arise with as little as 10% overlap.

Think of your overlap in this fashion:

Overlap FactorOverlap RangePortfolio Implications
LowUnder 10%Little required
Noticeable10% to 20%Needs tweaks
Medium20% to 30%Cracks showing
High30% to 40%Serious problems
ExcessiveOver 40%Start fresh

I highlight five ways to reduce the impact of portfolio overlap:

1. Design personal asset mix targets and invest within them.
2. Focus on portfolio diversification to achieve the least duplication.
3. Be extra careful when buying funds from the same provider.
4. Invest in Exchange Traded Funds and index funds.
5. Reduce the number of investment accounts to a minimum.

Probe the overlap factors affecting your nest egg. Try to keep duplicate and similar holdings as low as possible.

Limiting overlap also reduces portfolio risks. Your primary mission is to minimize overlap, not eliminate it.