Terry Smith: Portfolio Concentration Rules: Why Fund Managers Have to Sell Stocks They Like

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In this interview with medirectalk, Terry Smith discusses the portfolio concentration rules that fund managers have to follow. These rules limit the amount of money that can be invested in any one company or sector. Smith says that he sometimes has to sell stocks that he likes because of these rules, even though he believes they will continue to perform well. Here’s an excerpt from the interview:

Smith: I think we accept, and I hope our investors accept, that that kind of approach will lead to us having a good performance over time, but that there will be times when we won’t necessarily be as good as some other people or things out there.

If we don’t go as much in technology as some other people go we won’t be as good when things revived, like they did in the first half of this year, that we just won’t be there.

But equally we won’t be as bad as they were last year when having the consumer staples was a godsend to us in terms of what we got.

Because it really is a portfolio, and it’s a portfolio that we construct with amongst any other thoughts the one that we have no idea what’s going to happen next in the market.

So we want to be okay whichever direction it takes.

So that’s where we are.. I just like to touch upon selling things while we here.

One of the things that we do have to deal with are the portfolio concentrations which obviously we follow, we’ve got our own ones but we’ve got the the mandated ones.

And we quite often find ourselves having to sell things because they are affecting our holdings over 5%. We can’t have more than 40% of companies are over 5% of the portfolio(*).

So there are days, of which today is one for example, where I end up taking some out from one of those companies not because I want to but because of the concentration rules.

And look they’re there to protect people I guess for a degree, but I do find it a bit strange that as a fund manager there are days when I come in worrying that my best stocks will
perform well.

Or my biggest stocks will perform well but… is this right?

I’m not sure this should be exactly how I should be led to think about this portfolio that my biggest stocks are performing well and I’ve got a headache.

*UCITS specific requirements – No single asset can represent more than 10% of the fund’s assets; holdings of more than 5% cannot in aggregate exceed 40% of the fund’s assets.  This is known as the “5/10/40” rule.

You can listen to the entire discussion here:

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