A focused fund is a means of investing in the stock market. Unlike most funds, which spread risk by investing a wide variety of stocks, a focused fund splits the investment across only a small number of stocks. While this is inherently more risky, it can provide better returns if the fund manager successfully makes use of its advantages.
The principles of a focused fund make it very distinctive from the most common investment strategies. This is because this type of fund lacks diversification. Diversification is the belief that it is better to put your money into a wide range of stocks so that you are not exposed to too much risk if one of those stocks suddenly performs very badly.
Of course, the downside to diversification is that you do not benefit as much if one of the stocks you invest in suddenly performs very well. The structure of a focused fund means that it has the potential to do much better than a traditional investment strategy, but it also has the potential to do much worse. This makes the role of a fund manager even more important than usual.
One of the main selling points of a focused fund is that the fund manager has fewer stocks to keep track of. This means that they can pay more attention to each individual stock. The theory is that this increases the likelihood that they will correctly judge the most profitable time to buy and sell stocks.
Managers of focused funds may also use tactics specifically designed to minimize the inherent risks of having such a narrow range of investments. For instance, some funds use a strategy known as a “margin of safety.” This is where the funds mainly invest in stocks with a very low market price which they believe is much lower than its true value and will likely rise. The idea is that even if they guess wrong, the stock does not have much room to fall even lower and cause substantial losses.
There are other possible definitions of focused fund beyond simply looking at the number of different stocks the money is invested in. One example would be a fund that only invests in a narrow range of market sectors such as particular industries. The results will therefore be much more susceptible to changes in that industry as a whole. Another definition is a fund that invests in a large number of stocks, but puts the majority of the money into only a small number of the stocks.