What is a concentrated portfolio?

What is a concentrated portfolio? 

It is a portfolio construction strategy that involves buying a small number of high-quality stocks. This strategy is very much the opposite of a diversified portfolio. In this approach, investment is done in a select few stocks after thorough research and analysis. Here, the challenge lies in selecting the right companies that can beat the markets in the longer run. 

Suitability 

Since this approach involves investing in a fewer number of stocks as compared to a diversified portfolio, the portfolio can either generate high returns or cause heavy losses. Therefore, this strategy is more suitable for investors with a high-risk appetite.  

Significance

Often touted as a very risky approach, a concentrated portfolio has the potential to generate returns that are higher than market returns. It is better to own a handful of stocks that are obtained after thorough research and at an attractive valuation than to buy a large number of stocks without proper scrutinisation. By investing in only a select few companies, a fund manager can monitor the portfolio more efficiently and develop a deeper understanding of the stocks in his portfolio. This analysis will help him determine how appropriate a valuation is and decide whether to hold, increase, or sell a position. This will lead to an improvement in both, downside protection as well as upside potential.