The case against concentrated funds: new evidence on the downsides of conviction
- Robin Powell
- 1 hour ago
- 8 min read
A major Morningstar study of more than 5,800 funds has found that concentrated "high-conviction" portfolios delivered lower returns, charged higher fees, and suffered deeper losses than their more diversified peers.
We all know the driver who refuses to take the motorway. They've got a better route, through the villages, past the farm, left at the pub. Their shortcut sometimes saves ten minutes. More often it doesn't. And when something goes wrong — a tractor, a closed road — the whole journey falls apart. But they never lose conviction. Next time, they insist, will be different.
Concentrated fund management works on the same logic. Give a skilled stock picker fewer holdings, the argument goes, and their best ideas will shine. Strip out the deadweight. Let conviction do the heavy lifting.
It's a compelling pitch. It's also one the evidence doesn't support.
UK investors will recognise the approach. Terry Smith's Fundsmith Equity Fund returned just 0.8% in 2025 against 12.8% for the MSCI World Index, its fifth consecutive year of underperformance. Nick Train, another celebrated stock picker, has described recent years as among the most disappointing of his career.
But this isn't an article about Smith or Train. They're symptoms, not the disease. The real question is whether concentration as a strategy — fewer holdings, bigger bets, higher fees — works for the investors who buy into it. A major new study gives us a definitive answer.
"It's a compelling pitch. It's also one the evidence doesn't support."
What 5,800 funds reveal about the returns on conviction
Concentrated funds, on average, delivered lower returns. That's the headline finding from Morningstar research published in January 2026.
The study, Bold Portfolios: Are They Worth Their Risks?, analysed more than 5,800 European-domiciled equity funds and ETFs over the decade through September 2025. Its authors (Mathieu Caquineau, Egor Gorbatikov, and Francesco Paganelli) built a multidimensional Concentration Score that goes well beyond the simple "number of holdings" metric most investors rely on.
This matters. A fund holding 200 stocks can still be heavily concentrated if those stocks cluster in the same sectors or move in lockstep. Morningstar's score captures stock-level concentration (number of holdings, top-ten weight, and the Herfindahl-Hirschman Index), sector-level concentration (exposure to individual industries), and return-based concentration (how correlated the holdings are). It's a far more complete picture than counting names on a factsheet.
The annual return gap between the least and most concentrated terciles was 1.0%, and it was statistically significant. Over a full decade, that compounds into real money.
From September 2015 to September 2025, low-concentration portfolios outperformed high-concentration portfolios in every regional category. In the US, the gap was 357% versus 326%. Globally, 277% versus 249%. In Europe, 203% versus 188%. Morningstar notes that the difference amounts to roughly one tenth of total ten-year returns in the US and global categories.
That's not a rounding error.
One caveat: passive funds beat active funds on average over this period, and because passive strategies are more diversified, their inclusion in the low-concentration group likely boosted its showing. But across thousands of funds, over a full market cycle, diversification won.
Concentrated funds charge more for the privilege
Concentration doesn't just underperform. It costs more too.
Active funds in the most concentrated tercile charge on average 31 basis points more per year than those in the least concentrated tercile. Even among passive funds, the pattern holds: more concentrated means more expensive, though the gap narrows to nine basis points.
Why? Concentrated managers can charge more because the pitch sounds more labour-intensive. As Morningstar puts it, the premium "likely reflects the managers' ability to charge higher fees for specialised expertise and more active decision-making, which require intensive research and are often marketed as offering greater alpha potential." Diversified active funds, by contrast, use systematic, scalable processes that keep costs lower.
So investors in concentrated funds pay a premium for boldness, then watch that extra cost become the very barrier the strategy fails to overcome. It's the investing equivalent of burning more fuel on a slower journey.
And the drag compounds. Start each year 31 basis points behind your more diversified competitors, and over a decade that fee gap alone eats a sizeable chunk of your returns.
Investors in concentrated funds pay a premium for boldness, then watch that extra cost become the very barrier the strategy fails to overcome.
When one bad stock can wreck the journey
Lower returns and higher fees are bad enough. But concentration carries a third cost: it makes severe losses more likely.
The most concentrated funds show a far wider spread of results, with fatter tails on both sides. Concentration can produce spectacular outperformance, yes. But it produces severe underperformance with similar or greater frequency. The bell curve fattens at the painful end.
The drawdown data reinforces the point. The left tail of the distribution was "substantially heavier" for highly concentrated portfolios. On average, the most concentrated funds suffered drawdowns about 2.0 percentage points deeper than the least concentrated, and that gap was statistically significant.
One stock illustrates this. Novo Nordisk was the single largest detractor for Fundsmith Equity in 2025, costing the fund 3.0 percentage points of performance according to State Street attribution data published in the Fundsmith annual letter. One holding, in a portfolio of 29 stocks, dragging down an entire year. As Laith Khalaf of AJ Bell put it: "his concentrated approach means that when they go wrong, they really sting."
That's the trouble with shortcuts. One wrong turn and the whole journey unravels.
Why "conviction" is such a powerful sales pitch
If the evidence against concentrated funds is this clear, why do investors keep buying in?
Start with the language. "Conviction" is a brilliantly effective piece of marketing. It implies insight, bravery, and special knowledge. It frames a concentrated portfolio as a feature, not a risk. Nobody puts "dangerously undiversified" on a factsheet. The industry chose its words carefully, and they work.
Then follow the money. Concentrated funds command higher fees, giving the industry every incentive to keep selling boldness. Morningstar's analysis of fund flows found that investors care far more about past performance than about concentration levels when deciding where to put their money. Flows chase returns, not sensible portfolio construction. So a concentrated fund that gets lucky for a few years attracts a rush of capital, locks in higher fees, and then quietly disappoints while the next star manager takes the spotlight.
The broader picture is sobering. AJ Bell's Manager vs Machine report, published in December 2025 with data to 30 November 2025, found that just 24% of active managers across seven equity sectors beat a passive alternative over ten years. A record low since the report launched in 2021. In the Global sector, the figure drops to 13%. As Khalaf put it: "The era of the star manager has now very much given way to the age of the passive machines."
Investment Association data cited in the same report tells its own story: £121 billion has flowed out of active fund strategies over the past four years.
"Nobody puts 'dangerously undiversified' on a factsheet. The industry chose its words carefully, and they work."
What the evidence says you should do instead
For most investors, broad diversification at low cost remains the evidence-based default.
Morningstar's data confirms what decades of academic research has shown: passive funds are less concentrated across every dimension the study measured. They hold far more names, carry lighter top-ten weights, and display lower sector concentration. The result is steadier performance and a much lower chance of catastrophic loss.
This doesn't mean all active funds are bad. It means concentration is the problem, not active management per se. Morningstar is careful to note that "concentration is neither bad nor good, per se." A manager with a genuine, persistent edge might justify a focused portfolio. But most don't have one, and "without a clear edge, a concentrated portfolio is simply riskier." Systematic strategies and multi-manager approaches can deliver genuine diversification without defaulting to an index tracker.
One issue deserves particular attention. Growth funds have become the most concentrated segment across European, global, and US categories. These conviction funds increasingly hold the same mega-cap technology stocks that already dominate broad market indices. An investor paying active fees for a concentrated growth fund may be getting an amplified bet on stocks they already own through a cheap tracker. That's not conviction. It's expensive duplication.
Diversification has long been called the one free lunch in investing. The Morningstar evidence suggests the meal is still being served. Diversified funds delivered more consistent top-quartile outcomes and proved easier to own through volatile markets. They won't produce the most exciting dinner party stories. But they're far less likely to leave you hungry.
Five questions to ask before buying a concentrated fund
If you're considering a concentrated fund, stress-test the decision first.
1. What's the real concentration profile? "Number of holdings" is a starting point, not the full picture. Sector exposure and the correlation between holdings matter just as much.
2. Am I paying a premium for boldness? Compare the fund's fees with more diversified alternatives in the same category. If you're paying more, ask what evidence supports the extra cost. The historical record isn't encouraging.
3. How much overlap is there with what I already own? Growth-oriented concentrated funds increasingly hold the same mega-cap stocks that dominate broad indices. You may be paying active fees for exposure you already have through a low-cost tracker.
4. Could I stomach a single stock wiping 3% off my return in one year? If not, a concentrated portfolio probably doesn't suit your temperament. The bad years can be brutal.
5. Is this recommendation based on evidence or narrative? "Conviction" makes a better story than diversification. That doesn't make it a better investment.
The main road gets you there
"Stories don't compound. Returns do."Â
The shortcut driver is still out there, insisting their route is better. They have conviction. They always have an explanation for why it didn't work this time.
But a decade of data across more than 5,800 funds tells a clear story. The main road gets you there more reliably, more cheaply, and with fewer breakdowns along the way. The fund industry will keep selling boldness, because it justifies higher fees and makes for better marketing.
Stories don't compound. Returns do.
Resources
Caquineau, M., Gorbatikov, E., & Paganelli, F. (2026). Bold portfolios: Are they worth their risks? Morningstar Manager Research, January 2026.
AJ Bell (2025). Manager vs Machine, December 2025.
Fundsmith Equity Fund annual letter to owners, January 2026.
Your portfolio deserves better than a sales pitch
If this article has you questioning whether "conviction" is working for you or for your fund manager, you're asking the right question. The advisers in our Find an adviser directory don't sell star managers or concentrated bets. They build diversified, low-cost portfolios grounded in the evidence. Find one near you and start a conversation.
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