"The Fund is classified as non-diversified"

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nisiprius
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"The Fund is classified as non-diversified"

Post by nisiprius » Fri Oct 30, 2015 1:58 pm

Since my (incorrect!) understanding was that the Investment Company Act of 1940 requires mutual funds to be diversified--an SEC director said
A fund's portfolio must meet stringent diversification and liquidity standards.
--I was trying to figure out how problems with a single stock could have caused a 20% drop in the value of the Sequoia Fund, SEQUX, in less than three months.

However, it appears that a mutual fund need not meet those "stringent diversification standards"--as long as it tells you that it doesn't.

The prospectus for the Sequoia Fund is clear enough, if you read it:
The Fund is classified as non-diversified.
Image
Here's something interesting to me. This rather important fact--"the Fund is classified as non-diversified" is not, as far as I can see, mentioned in their fairly detailed summary description. You have to go to the prospectus to learn it (or read the actual list of investments).
The Fund’s investment objective is long-term growth of capital. In pursuing this objective the Fund focuses on investing in equity securities that it believes are undervalued at the time of purchase and have the potential for growth. A guiding principle is the consideration of equity securities, such as common stock, as units of ownership of a business and the purchase of them when the price appears low in relation to the value of the total enterprise. No weight is given to technical stock market studies. The balance sheet and earnings history and prospects of each company are extensively studied to appraise fundamental value. The Fund normally invests in equity securities of U.S. and non-U.S. companies. The Fund may invest in securities of issuers with any market capitalization. The Fund typically sells the equity security of a company when the company shows deteriorating fundamentals, its earnings progress falls short of the investment adviser’s expectations or its valuation appears excessive relative to its expected future earnings.

Ordinarily, the Fund’s portfolio is invested in equity securities of U.S. and non-U.S. companies. The Fund is not required, however, to be fully invested in equity securities and, in fact, usually maintains a portion of its total assets in cash and securities generally considered to be cash equivalents, including, but not limited to, short-term U.S. Government securities. Depending upon market conditions, cash reserves may be a significant percentage of the Fund’s net assets. The Fund usually invests its cash reserves principally in U.S. Government securities.
So, the questions I have are: have you read the prospectuses for your funds? Do you know--either by reading the prospectus or in some other way--whether you are holding any funds that are "classified as non-diversified?"

For advisors, if you are reading this: have you recommended any non-diversified mutual funds like Sequoia to your clients, and were you careful to point out that they were not diversified?
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Re: "The Fund is classified as non-diversified"

Post by livesoft » Fri Oct 30, 2015 2:10 pm

Vanguard Wellesley has 60 or 58 stocks depending on which web site you look at. SEQUX has 41 stocks. Wellesley has some bonds, too. Is it non-diversified? I don't own Wellesley and won't own it, so I am not going to read the prospectus. I suppose if it doesn't have more than 5% (or is another number) in a single holding then it is not non-diversified.

The funds I hold generally have at least 500 holdings. Even the small-cap EM fund DGS is reported to have 565 stock holdings.
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Re: "The Fund is classified as non-diversified"

Post by nisiprius » Fri Oct 30, 2015 2:51 pm

I peeked at a couple of Vanguard prospectuses for funds even more specialized than Wellesley and they didn't have that language. The prospectus for Wellesley does not have it.

According to Scottrade,
A diversified fund has three primary rules to which it adheres:
  • 75% or more of its assets are invested in securities
  • No more than 5% of its assets are invested in any one security
  • Contains no more than 10% of the outstanding shares for any one security
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Re: "The Fund is classified as non-diversified"

Post by btenny » Fri Oct 30, 2015 3:07 pm

Back when I took over my investing some funds were "focused" and invested in limited numbers of stocks. Sequoia was one fund. Back then they invested in even fewer stocks than now. I thought it was like 10ish stocks that made up the bulk of their portfolio but the fund was much smaller. I read the prospectus but found the fund closed so did not pursue it further.

This is from memory of 10 years ago reading of a biography about Warren Buffett. I do not remember the book name and I have since looked. In that book he is quoted as saying 7-9 stocks is optimum from a math standpoint because it gives you the most return yet protecting you via diversification. They quoted statistics and some papers. That book also quoted a 10% (??) advantage for focusing versus more diversification. I also have read some people on this board saying that 8-10 properly selected stocks gave you most of the diversification necessary. See below for his current 8 stocks. http://www.usatoday.com/story/money/mar ... /27659795/
From here you can see 80% of his portfolio is in 10 stocks. http://www.stockpickr.com/pro/portfolio/warren-buffett/

Please comment as I would like to find references to the above information.

Just thinking..
Last edited by btenny on Fri Oct 30, 2015 3:11 pm, edited 1 time in total.

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Re: "The Fund is classified as non-diversified"

Post by mickeyd » Fri Oct 30, 2015 3:10 pm

I have always made it a point to read (not study) any MF document that I receive. I usually have a highlighter in my hand. This includes prospectus, SA report, Ann report and quarterly statements. I usually find out new stuff each time I read these "boring docs."

Thanks for bringing up this topic.
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Re: "The Fund is classified as non-diversified"

Post by Levett » Fri Oct 30, 2015 3:13 pm

Yes, I own Wellesley. Yes, I have read and will continue to read each prospectus. No, I would not put money in a fund that, according to Morningstar, had 29% of assets wrapped up in VRX.

And these are Wellesley's top ten positions, according to Vanguard--all businesses that I am happy to own (indirectly):

1. Microsoft Corp. 1.6%
2 Wells Fargo & Co. 1.6%
3 JPMorgan Chase & Co. 1.4%
4 Merck & Co. Inc. 1.3%
5 Johnson & Johnson 1.3%
6 Exxon Mobil Corp. 1.2%
7 General Electric Co. 1.1%
8 Verizon Communications Inc. 1.1%
9 Cisco Systems Inc. 1.1%
10 Pfizer Inc. 1.1%
Ten largest holdings = 12.8% of total net assets


Lev

P.S. For VRX and Sequoia and its shareholders it's really getting ugly: http://tinyurl.com/o9bxg49
Last edited by Levett on Fri Oct 30, 2015 3:22 pm, edited 1 time in total.

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Re: "The Fund is classified as non-diversified"

Post by afan » Fri Oct 30, 2015 3:20 pm

I have not checked lately, but pretty sure Total Stock Market is diversified.

Sequoia was and is actively managed. Even if diversified, off the table for me.

I do read the prospectus before investing.

I think Sequoia did great for a long time as an undiversified fund. May have been /probably was luck. Most deviations from market risk adjusted return are.
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Re: "The Fund is classified as non-diversified"

Post by livesoft » Fri Oct 30, 2015 3:28 pm

Years ago there was a web site that allowed one to create a portfolio that others could track. It may still exist. The idea was to create a mutual fund on paper (in silico) and compete with others doing the same thing. One's mutual fund was checked for the 3 primary rules noted by nisiprius, so I knew about the 5% and the 10% numbers.

I think the web site's idea was also to find some of the best idea makers and ultimately let other participants invest in their funds. Maybe it was related to FolioFN or Motif Investing, but I cannot remember anymore.
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Re: "The Fund is classified as non-diversified"

Post by JoMoney » Fri Oct 30, 2015 3:37 pm

Vanguard's PRIMECAP Fund has "concentration risk" listed
https://personal.vanguard.com/us/funds/ ... =INT#tab=2
Asset concentration risk: The chance that the fund’s performance may be hurt disproportionately by the poor performance of relatively few stocks. The fund tends to invest a high percentage of assets in its ten largest holdings.
But even that fund doesn't go as far as having 30% of the fund wrapped up in a single stock the way SEQUX did.

If what you wanted from an active fund was to have the managers ability to pick undervalued companies shine through, I don't think you'd want that 'diversified' away into something that merely tracks his ability to pick sectors or style bets. The same way a small-value tilter want that 'risk factor' to impact their portfolio, someone picking a manager might want that individual stock risk factor. It should be obvious that such an investor doesn't take the stance that such risks are 'unrewarded' the way some theorize.

I don't think I have the ability to pick individual stocks, and that leads me to believe my ability to pick stock pickers would be suspect as well, so that's a risk I don't want - but I do believe some people are able to value a business better than the markets average beyond just being lucky.
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Re: "The Fund is classified as non-diversified"

Post by jebmke » Fri Oct 30, 2015 4:26 pm

I always read the prospectus. I do skip some of the boilerplate on some since it is identical on VG funds prospectuses.
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Re: "The Fund is classified as non-diversified"

Post by nisiprius » Fri Oct 30, 2015 5:18 pm

JoMoney wrote:Vanguard's PRIMECAP Fund has "concentration risk" listed
https://personal.vanguard.com/us/funds/ ... =INT#tab=2
Asset concentration risk: The chance that the fund’s performance may be hurt disproportionately by the poor performance of relatively few stocks. The fund tends to invest a high percentage of assets in its ten largest holdings.
Hmmm... according to the semiannual report
Image
it has holdings of over 5% of its portfolio in Biogen and in Amgen. That would seem to make it "non-diversified."

And yet the prospectus does not say that the fund is "classified as non-diversified."

This is getting interesting... is a non-diversified fund allowed to disclose that fact using any kind of language it wants, such as "concentration risk?"
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Re: "The Fund is classified as non-diversified"

Post by jalbert » Fri Oct 30, 2015 5:49 pm

nisiprius wrote:So, the questions I have are: have you read the prospectuses for your funds? Do you know--either by reading the prospectus or in some other way--whether you are holding any funds that are "classified as non-diversified?"
Even the prospectus is a bit of a synopsis of the real document, which is misleadingly named the "Statement of Additional Information".

-jalbert

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Re: "The Fund is classified as non-diversified"

Post by mickeyd » Fri Oct 30, 2015 6:04 pm

jalbert wrote:
nisiprius wrote:So, the questions I have are: have you read the prospectuses for your funds? Do you know--either by reading the prospectus or in some other way--whether you are holding any funds that are "classified as non-diversified?"
Even the prospectus is a bit of a synopsis of the real document, which is misleadingly named the "Statement of Additional Information".

-jalbert

If I'm not mistaken, the SAI is a completely different doc than the prospectus.
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Re: "The Fund is classified as non-diversified"

Post by neurosphere » Fri Oct 30, 2015 6:06 pm

Note that, by definition, most "fund of funds" are also non-diversified, because they hold more than 5% of an underlying security, even though the underlying security itself is "diversified":

http://www.sec.gov/Archives/edgar/data/ ... 000870.txt
Comment: Please explain why the Fund profiles do not include non-
diversification risk as a primary risk.

Response: We do not consider non-diversification risk to be a primary
risk for the Funds. Each Fund, as a fund of funds, is
classified as non-diversified solely because of a position
taken by the Commission staff several years ago.
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Re: "The Fund is classified as non-diversified"

Post by jalbert » Fri Oct 30, 2015 7:51 pm

There are actually 3 documents offered:

Summary Prospectus
Statutory Prospectus
Statement of Additional Information (SAI)

The Summary Prospectus is marketing fluff.

From the SEC website re: the SAI....
Mutual funds and closed-end funds (but not UITs) also are required to have statements of additional information (SAIs). Funds must give you the SAI without charge if you request it.

The SAI conveys information about the fund that some investors find useful. The SAI affords the fund an opportunity to expand discussions of the matters described in the prospectus. The SAI generally includes the fund’s financial statements and information (or additional information) about: the history of the fund; some fund policies (such as on borrowing and concentration policies); officers, directors and persons who control the fund; investment advisory and other services; brokerage commissions; tax matters; and performance measures, such as, average annual total return.
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Re: "The Fund is classified as non-diversified"

Post by Tier1Capital » Fri Oct 30, 2015 8:28 pm

The Primecap Fund has not violated mutual fund diversification rules. Here's why: the 1940 Act diversified fund rule only applies to 75% of a mutual fund's assets. The remaining 25% can be entirely in one holding. Or split between two holdings, etc.

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Re: "The Fund is classified as non-diversified"

Post by nisiprius » Fri Oct 30, 2015 9:01 pm

Tier1Capital wrote:The Primecap Fund has not violated mutual fund diversification rules. Here's why: the 1940 Act diversified fund rule only applies to 75% of a mutual fund's assets. The remaining 25% can be entirely in one holding. Or split between two holdings, etc.
Hmmm... trusting Scottrade's summary... securities means stocks and bonds.

It says that no more than 5% of the fund can be invested in any one security. That means that no single stock or bond should represent more than 5% of the fund's assets.

Now, it says up to 25% of the fund can be in things that are not securities, and that could be a single holding--but it couldn't be a stock.

For example, the Vanguard Precious Metals and Mining fund says that "The fund may also invest up to 20% of its assets directly in gold, silver, or other precious metal bullion and coins." In fact, it doesn't, at least not more than a tiny fraction of 1%. But this would be an example of a fund that could be invested in:
20% gold
4% this stock
3% that stock
etc.
and be diversified. But as I understand it, it couldn't be invested in
20% this stock
4% that stock
3% that stock
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Re: "The Fund is classified as non-diversified"

Post by btenny » Fri Oct 30, 2015 9:30 pm

According to Yahoo Finance, Primecap holds no bonds and is strictly a large cap growth fund. And from the same site it holds only one stock that accounts for more than 5% of it holdings, Biogen, at 8.26% as of June (Vanguard says this is now down to 6.5% at the end of Sept.). Two other stock holdings are slightly over 5%. Both are also in the healthcare area. So based on the "rules" above it qualifies as a diversified mutual fund.

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Re: "The Fund is classified as non-diversified"

Post by JoMoney » Fri Oct 30, 2015 9:38 pm

The Dow Jones Industrial Average holdings might be considered non-diversified by that standard. The prospectus for DIA ETF that tracks that index doesn't say anything specifically about being 'non-diversified' but does give a general warning:
... The Trust may have significant investments in one or more specific industries or sectors, subjecting it to risks greater than general market risk.
The Trust may invest a larger percentage of its assets in the securities of a few issuers. As a result, the Trust’s performance may be disproportionately impacted by the performance of relatively few securities.
It also gives some vague warnings about diversification requirements to be considered a "Registered Investment Company", which they believe and intend to qualify as, but if they fail to means the trust could have internal tax consequences.
It also mentions that investors from ERISA plans should carefully consider if it "...is consistent with the prudence and diversification requirements of ERISA"
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Re: "The Fund is classified as non-diversified"

Post by grabiner » Fri Oct 30, 2015 9:49 pm

At one point, Growth Index became technically non-diversified, because its four largest holdings were each more than 5% of the fund and combined to exceed 25%. Vanguard posted an announcement, but this made it clear that the non-diversification was not a real concern.

In addition, you don't really care that a single fund is non-diversified if your whole portfolio is well-diversified. REIT Index is non-diversified, but if 10% of your portfolio is in REIT Index, you may not have any more of your portfolio in REITs than in oil.
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Re: "The Fund is classified as non-diversified"

Post by xenial » Fri Oct 30, 2015 10:46 pm

livesoft wrote:Years ago there was a web site that allowed one to create a portfolio that others could track. It may still exist. The idea was to create a mutual fund on paper (in silico) and compete with others doing the same thing. One's mutual fund was checked for the 3 primary rules noted by nisiprius, so I knew about the 5% and the 10% numbers.

I think the web site's idea was also to find some of the best idea makers and ultimately let other participants invest in their funds. Maybe it was related to FolioFN or Motif Investing, but I cannot remember anymore.
It's called Marketocracy. The concept is based upon a thorough lack of statistical understanding. The idea is that a huge number of people create portfolios. Some of them do extremely well (surprise, surprise). The services of these "skilled" top performers are sold to gullible investors.

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Re: "The Fund is classified as non-diversified"

Post by nisiprius » Sat Oct 31, 2015 7:39 am

grabiner wrote:At one point, Growth Index became technically non-diversified, because its four largest holdings were each more than 5% of the fund and combined to exceed 25%. Vanguard posted an announcement, but this made it clear that the non-diversification was not a real concern...
Actually, random Googling since I started the thread has indicated that typical funds-of-funds like the Target Retirement funds are formally classified as non-diversified, but Vanguard argued successfully with the SEC that that didn't need to be in the prospectus because each of funds within the fund were diversified.

Presumably one could say the same thing about a hypothetical mutual fund that held a small number of index ETFs.

But that starts to raise questions... could a mutual fund have a holding >> 5% in, say, Berkshire Hathaway or General Electric and argue successfully that the fund met the standard for diversification because that individual stock was actually "diversified" all by itself?
In addition, you don't really care that a single fund is non-diversified if your whole portfolio is well-diversified. REIT Index is non-diversified, but if 10% of your portfolio is in REIT Index, you may not have any more of your portfolio in REITs than in oil.
I disagree, David. In a broad sort of way one expects certain things from mutual funds, and in fact I worry that the boundaries between "mutual funds as we know them" and hedge funds are gradually becoming blurred--there seem to be more and more mutual funds, particularly in the "alternative" space, that are doing things with leverage, and holding things that are not securities, and holding things that are not so liquid, that may be legal and pass SEC muster but represent a different kind of thing than traditional mutual funds. I think people ought to be well aware that individual components of their portfolio might be "classified as non-diversified" despite being mutual funds.

Diversification is in the eye of the beholder and is one of those words like "risk" that has multiple meanings, but whether a fund does or does not meet an important SEC definition is meaningful.

But yes, I see that REIT Index, VGSIX, has 8.6% of its holdings in Simon Properties... and yet the prospectus does not say that the fund is "classified as non-diversified." They say in their "product summary" that
One of the fund’s primary risks is its narrow scope, since it invests solely within the real estate industry and may be more volatile than more broadly diversified stock funds
and in the prospectus that
This focus on a single sector may result in more risk than that for a more diversified, multisector portfolio.
So there is disclosure, but Vanguard doesn't like to say its funds are "classified as non-diversified."

Is their some trivially easy way, an SEC website perhaps, where you can look up how a mutual fund is "registered?"
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Re: "The Fund is classified as non-diversified"

Post by neurosphere » Sat Oct 31, 2015 9:26 am

nisiprius wrote:
Tier1Capital wrote:The Primecap Fund has not violated mutual fund diversification rules. Here's why: the 1940 Act diversified fund rule only applies to 75% of a mutual fund's assets. The remaining 25% can be entirely in one holding. Or split between two holdings, etc.
Hmmm... trusting Scottrade's summary... securities means stocks and bonds.

It says that no more than 5% of the fund can be invested in any one security. That means that no single stock or bond should represent more than 5% of the fund's assets.

Now, it says up to 25% of the fund can be in things that are not securities, and that could be a single holding--but it couldn't be a stock.
Tier1Capital is correct. The law requires a diversified fund to hold 75% in securities. OF THAT 75%, no more than 5% can be in any one security. Now, the remaining 25% can be invested without restrictions, "security or not".

One way to think about this is to define diversified as a fund in which at least 75% of the holdings can be rearranged such that there is no more than 5% in any one security in that 75%. This would exclude a mutual fund from being diversified which has a 25% stake in stock ABC and 6% stake in XYZ, but NOT potentially exclude a company with 10% in ABC and 10% in XYZ and 10% in CCC. Because in the second example the 75% portion could contain half of the ABC holdings (i.e. 5%) and the 25% portion would contain the other 5% of ABC, along with XYZ and CCC. So I THINK (need to confirm) that one could have a diversified fund which contains up to 30% of any one holding. But it certainly is true that 25% is allowed.

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Re: "The Fund is classified as non-diversified"

Post by neurosphere » Sat Oct 31, 2015 9:37 am

Here's how one review book describes it:
An investment company qualified as a diversified investment company if it meets the following 75-5-10 test:

-- 75% of the total assets much be invested in securities issued by companies other than the investment company or its affiliates. Cash on hand and cash equivalent (short-term government and money market securities) are counted as part of the 75% required investment in outside companies.

-- Of this 75%, no more than 5% of the total assets can be invested in any one corporation's securities

-- Of this 75%, the investment company can own no more than 10% of an outside corporation's voting class securities (common stock).
That gives broad leeway for the remaining 25%, including holding stock which exceeds the 10% voting interest.

NS

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Re: "The Fund is classified as non-diversified"

Post by Castanea_d. » Sat Oct 31, 2015 9:47 am

From the VGPMX (VG precious metals and mining) statutory prospectus, pg. 7 (my emphasis):
https://personal.vanguard.com/pub/Pdf/p ... 2210105034
The Fund is subject to nondiversification risk, which is the chance that the Fund’s performance may be hurt disproportionately by the poor performance of relatively few stocks or even a single stock. The Fund is considered nondiversified, which means it may invest a greater percentage of its assets in the securities of particular issuers as compared with other mutual funds. Because the Fund tends to invest a high percentage of assets in its ten largest holdings, nondiversification risk is very high for the Fund.
Likewise, from the Statement of Additional Information, page B-1.
https://personal.vanguard.com/pub/Pdf/s ... 2210105371
This SAI covers the entire group of “specialized” Vanguard mutual funds (Dividend Appreciation, Dividend Growth, Energy, Health Care, Precious Metals and Mining, REIT Index). This group is identified earlier on page B-1 as “Vanguard Specialized Funds (The Trust)” and subsequently referred to as “The Trust”). Again, my emphasis:
The Trust was organized as a Pennsylvania business trust in 1983, was reorganized as a Maryland corporation in 1986, and was reorganized as a Delaware statutory trust in 1998. Prior to its reorganization as a Delaware statutory trust, the Trust was known as Vanguard Specialized Portfolios, Inc. The Trust is registered with the United States Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. All Funds within the Trust, other than the Precious Metals and Mining Fund, are classified as diversified within the meaning of the 1940 Act. The Precious Metals and Mining Fund is classified as nondiversified within the meaning of the 1940 Act.
This is further described on page B-4, under the heading “Diversification.” I won’t quote it here; most of the paragraph outlines the requirements of the 1940 Act, but it gives a separate sentence of description for the policies followed by VGPMX. They can hold up to 25% of assets in a single issuer, and the aggregate of all holdings over 5% of assets (or 10% of issuer’s outstanding voting securities, which VGPMX has sometimes held in some “junior” mining companies) can be up to 50% of assets. This is significantly more concentrated than a diversified fund.

Diversification is important. But a non-diversified investment such as VGPMX can still be part of a diversified portfolio. It is well to know what you have and to treat it accordingly, and I think that Vanguard makes it pretty clear in the prospectus and other information about VGPMX, even though they bury the explicit statement that they are “classified as nondiversified" under the 1940 Act in the SAI.
nisiprius wrote:So, the questions I have are: have you read the prospectuses for your funds? Do you know--either by reading the prospectus or in some other way--whether you are holding any funds that are "classified as non-diversified?"
To return to the OP’s question: yes, I read the statutory prospectuses and the reports for each fund in which I invest each time when a new one is released, and I read them very carefully before an initial investment. I don’t read the SAI’s routinely – I do before initial investment, but I don’t after that. Today’s look at the SAI quoted above shows me that perhaps I should; I think that it has changed in a few respects from what I remember.

Again, Vanguard is pretty good about putting the important information out front and in plain English (I very much like their “Plain talk” boxes in such documents). Not all investment companies are this way. For example, when I was first looking into precious metal investment, I delved into the statutory prospectus and SAI for GLD, the ETF that invests in gold bullion. Even to someone who has read quite a few of these things, I found it incomprehensible, and I suspect it was that way by design. That was enough to keep me out of GLD and its cousin SLV.

For what it is worth, the current (9/30/15) holdings for VGPMX include 62 stocks (plus some platinum bullion), five of them exceeding 5%:

BHP Billiton - 7.4%
Nevsun Resources - 6.7%
Aginco Eagle - 6.4%
Randgold Resources - 5.4%
Dominion Diamond - 5.3%

The top ten holdings account for 48.9% of total assets.

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Re: "The Fund is classified as non-diversified"

Post by Steadfast » Sat Oct 31, 2015 10:59 am

I never read the prospectus of the Vanguard index funds I own, and don't have any excuses for why not.

But I did read the prospectus and other documents for the actively-managed tax exempt bonds funds I bought. For the California Intermediate-Term Tax Exempt fund (VCADX), the prospectus and reports are a detailed and interesting analysis of the fiscal health of the state, complete with relevant congressional and governance challenges, budget issues, and economic outlook. It was one of the most informative and concise sources of information on the economy of California I'd ever read, packed with information I never knew. Now I read each one, simply because I find it interesting and well-written source of information about my state of residence.
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Re: "The Fund is classified as non-diversified"

Post by nisiprius » Sat Oct 31, 2015 11:52 am

neurosphere wrote:
nisiprius wrote:
Tier1Capital wrote:The Primecap Fund has not violated mutual fund diversification rules. Here's why: the 1940 Act diversified fund rule only applies to 75% of a mutual fund's assets. The remaining 25% can be entirely in one holding. Or split between two holdings, etc.
Hmmm... trusting Scottrade's summary... securities means stocks and bonds. It says that no more than 5% of the fund can be invested in any one security. That means that no single stock or bond should represent more than 5% of the fund's assets. Now, it says up to 25% of the fund can be in things that are not securities, and that could be a single holding--but it couldn't be a stock.
Tier1Capital is correct. The law requires a diversified fund to hold 75% in securities. OF THAT 75%, no more than 5% can be in any one security. Now, the remaining 25% can be invested without restrictions, "security or not"...
I learned something today, thanks Tier1Capital and Neurosphere and apologies for doubting.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: "The Fund is classified as non-diversified"

Post by SVariance1 » Wed Jul 11, 2018 7:20 am

From the Investment Company Act of 1940:

(1) ‘‘Diversified company’’ means a management company
which meets the following requirements: At least 75 per centum
of the value of its total assets is represented by cash and
cash items (including receivables), Government securities, securities
of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5 per centum
of the value of the total assets of such management company
and to not more than 10 per centum of the outstanding voting
securities of such issuer.

If you take the view that a Fund could invest theoretically up to 30% (25% + 5%) of its portfolio in any one issuer, the Sequoia Fund, which claims to be non-diversified, might not be non diversified. It looks like its largest holding is Berkshire Hathaway at 12.6%. It possible that it could have a more 10% interest in the voting shares of a stock, though.
Mike

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Re: "The Fund is classified as non-diversified"

Post by azanon » Wed Jul 11, 2018 7:26 am

There must be some disagreement on this issue within the industry as to what really constitutes being diversified because occasionally i watch Mad Money, and they have this segment where callers call in and list the 5 stocks that they own asking Cramer if they're "diversified", and often he says that they are.

:mrgreen:

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Re: "The Fund is classified as non-diversified"

Post by SVariance1 » Wed Jul 11, 2018 7:31 am

azanon wrote:
Wed Jul 11, 2018 7:26 am
There must be some disagreement on this issue within the industry because occasionally i watch Mad Money, and they have this segment where callers call in and list the 5 stocks that they own asking Cramer if they're "diversified", and often he says that they are.

:mrgreen:
You are making the assumption that Cramer knows the legal aspects of the Investment Company act of 1940. I have not seen any evidence that he is a legal expert on the Investment Company act of 1940.
Mike

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Re: "The Fund is classified as non-diversified"

Post by azanon » Wed Jul 11, 2018 7:33 am

SVariance1 wrote:
Wed Jul 11, 2018 7:31 am
azanon wrote:
Wed Jul 11, 2018 7:26 am
There must be some disagreement on this issue within the industry because occasionally i watch Mad Money, and they have this segment where callers call in and list the 5 stocks that they own asking Cramer if they're "diversified", and often he says that they are.

:mrgreen:
You are making the assumption that Cramer knows the legal aspects of the Investment Company act of 1940. I have not seen any evidence that he is a legal expert on the Investment Company act of 1940.
Mrgreen = joke.

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Re: "The Fund is classified as non-diversified"

Post by SVariance1 » Wed Jul 11, 2018 7:52 am

azanon wrote:
Wed Jul 11, 2018 7:33 am
SVariance1 wrote:
Wed Jul 11, 2018 7:31 am
azanon wrote:
Wed Jul 11, 2018 7:26 am
There must be some disagreement on this issue within the industry because occasionally i watch Mad Money, and they have this segment where callers call in and list the 5 stocks that they own asking Cramer if they're "diversified", and often he says that they are.

:mrgreen:
You are making the assumption that Cramer knows the legal aspects of the Investment Company act of 1940. I have not seen any evidence that he is a legal expert on the Investment Company act of 1940.
Mrgreen = joke.
I was not sure what that emoticon meant. Gotcha! I was kind of surprised that people in this forum would be watching Cramer
Mike

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Re: "The Fund is classified as non-diversified"

Post by SVariance1 » Wed Jul 11, 2018 7:58 am

azanon wrote:
Wed Jul 11, 2018 7:26 am
There must be some disagreement on this issue within the industry as to what really constitutes being diversified because occasionally i watch Mad Money, and they have this segment where callers call in and list the 5 stocks that they own asking Cramer if they're "diversified", and often he says that they are.

:mrgreen:
If you look at the language in that part of the ACT, you can see why there might be some disagreement. The authors might have had a few beers before writing that part of the Act :mrgreen:
Mike

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Re: "The Fund is classified as non-diversified"

Post by azanon » Wed Jul 11, 2018 8:25 am

SVariance1 wrote:
Wed Jul 11, 2018 7:58 am
azanon wrote:
Wed Jul 11, 2018 7:26 am
There must be some disagreement on this issue within the industry as to what really constitutes being diversified because occasionally i watch Mad Money, and they have this segment where callers call in and list the 5 stocks that they own asking Cramer if they're "diversified", and often he says that they are.

:mrgreen:
If you look at the language in that part of the ACT, you can see why there might be some disagreement. The authors might have had a few beers before writing that part of the Act :mrgreen:
I don't mean to detract too much from the thread topic, but I imagine a lot of bogleheads like me watch Cramer just for entertainment value or just because the subject is finance. I can never get enough finance because I love the topic, even if the information being presented is silly and highly misguided. But it is shocking every time Cramer declares someone diversified with just 5 individual stocks. I think it's wrong for him to suggest people invest that way, and I think on some level even he knows its wrong.

Yes, that is some pretty crazy language in that part of the ACT. This is an interesting thread though and topic.

To answer Nispirius, yes I do carefully read the prospectuses of any funds that I invest in, and do consider whether or not I believe them to be diversified (if I'm using an all-in-one). Now if I have a portfolio of funds, then obviously each individual one doesn't have to be diversified if it represents only a small portion of my portfolio.

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Re: "The Fund is classified as non-diversified"

Post by dknightd » Wed Jul 11, 2018 8:44 am

SVariance1 wrote:
Wed Jul 11, 2018 7:20 am
From the Investment Company Act of 1940:

(1) ‘‘Diversified company’’ means a management company
which meets the following requirements: At least 75 per centum
of the value of its total assets is represented by cash and
cash items (including receivables), Government securities, securities
of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5 per centum
of the value of the total assets of such management company
and to not more than 10 per centum of the outstanding voting
securities of such issuer.

If you take the view that a Fund could invest theoretically up to 30% (25% + 5%) of its portfolio in any one issuer, the Sequoia Fund, which claims to be non-diversified, might not be non diversified. It looks like its largest holding is Berkshire Hathaway at 12.6%. It possible that it could have a more 10% interest in the voting shares of a stock, though.
I guess perhaps I do not understand what a "per centum" is. My assumption is/was it was the same as a percent.
I'm not sure I'd consider a diversified investment to hold 75% cash like things.
I read prospectus. I'm confused by 50% of what I read. I have a rough idea of how they invest. 50% chance I have no idea where my money is sitting :(

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Re: "The Fund is classified as non-diversified"

Post by SVariance1 » Wed Jul 11, 2018 9:06 am

dknightd wrote:
Wed Jul 11, 2018 8:44 am
SVariance1 wrote:
Wed Jul 11, 2018 7:20 am
From the Investment Company Act of 1940:

(1) ‘‘Diversified company’’ means a management company
which meets the following requirements: At least 75 per centum
of the value of its total assets is represented by cash and
cash items (including receivables), Government securities, securities
of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5 per centum
of the value of the total assets of such management company
and to not more than 10 per centum of the outstanding voting
securities of such issuer.

If you take the view that a Fund could invest theoretically up to 30% (25% + 5%) of its portfolio in any one issuer, the Sequoia Fund, which claims to be non-diversified, might not be non diversified. It looks like its largest holding is Berkshire Hathaway at 12.6%. It possible that it could have a more 10% interest in the voting shares of a stock, though.
I guess perhaps I do not understand what a "per centum" is. My assumption is/was it was the same as a percent.
It is percent but only after one has had a few alcoholic beverages :mrgreen:
Mike

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Re: "The Fund is classified as non-diversified"

Post by SVariance1 » Wed Jul 11, 2018 9:13 am

From the Oakmark Select Prospectus:

"PRINCIPAL INVESTMENT STRATEGY
The Fund invests primarily in common stocks of U.S. companies. The Fund is
non-diversified, which means that it may invest a greater portion of its assets in a
more limited number of issuers than a diversified fund."

Its largest holding is Alphabet (Google), which is about 9% of the fund
Mike

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Re: "The Fund is classified as non-diversified"

Post by dknightd » Wed Jul 11, 2018 10:03 am

SVariance1 wrote:
Wed Jul 11, 2018 9:06 am

It is percent but only after one has had a few alcoholic beverages :mrgreen:
may be that is the secret ?

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Re: "The Fund is classified as non-diversified"

Post by dknightd » Wed Jul 11, 2018 10:09 am

dknightd wrote:
Wed Jul 11, 2018 8:44 am
SVariance1 wrote:
Wed Jul 11, 2018 7:20 am
From the Investment Company Act of 1940:

(1) ‘‘Diversified company’’ means a management company
which meets the following requirements: At least 75 per centum
of the value of its total assets is represented by cash and
cash items (including receivables), Government securities, securities
of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5 per centum
of the value of the total assets of such management company
and to not more than 10 per centum of the outstanding voting
securities of such issuer.

If you take the view that a Fund could invest theoretically up to 30% (25% + 5%) of its portfolio in any one issuer, the Sequoia Fund, which claims to be non-diversified, might not be non diversified. It looks like its largest holding is Berkshire Hathaway at 12.6%. It possible that it could have a more 10% interest in the voting shares of a stock, though.
I guess perhaps I do not understand what a "per centum" is. My assumption is/was it was the same as a percent.
I'm not sure I'd consider a diversified investment to hold 75% cash like things.
I read prospectus. I'm confused by 50% of what I read. I have a rough idea of how they invest. 50% chance I have no idea where my money is sitting :(
So apparently 75% in cash like things is diversified. I guess it is. Cool. That is about where I stand today ;)

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Re: "The Fund is classified as non-diversified"

Post by MIretired » Wed Jul 11, 2018 1:32 pm

dknightd wrote:
Wed Jul 11, 2018 10:09 am
dknightd wrote:
Wed Jul 11, 2018 8:44 am
SVariance1 wrote:
Wed Jul 11, 2018 7:20 am
From the Investment Company Act of 1940:

(1) ‘‘Diversified company’’ means a management company
which meets the following requirements: At least 75 per centum
of the value of its total assets is represented by cash and
cash items (including receivables), Government securities, securities
of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5 per centum
of the value of the total assets of such management company
and to not more than 10 per centum of the outstanding voting
securities of such issuer.

If you take the view that a Fund could invest theoretically up to 30% (25% + 5%) of its portfolio in any one issuer, the Sequoia Fund, which claims to be non-diversified, might not be non diversified. It looks like its largest holding is Berkshire Hathaway at 12.6%. It possible that it could have a more 10% interest in the voting shares of a stock, though.
I guess perhaps I do not understand what a "per centum" is. My assumption is/was it was the same as a percent.
I'm not sure I'd consider a diversified investment to hold 75% cash like things.
I read prospectus. I'm confused by 50% of what I read. I have a rough idea of how they invest. 50% chance I have no idea where my money is sitting :(
So apparently 75% in cash like things is diversified. I guess it is. Cool. That is about where I stand today ;)
No. It's not just 75% cash like. It lists many forms of "securities" after the comma following "cash and cash items".

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Re: "The Fund is classified as non-diversified"

Post by grabiner » Wed Jul 11, 2018 7:42 pm

SVariance1 wrote:
Wed Jul 11, 2018 7:20 am
From the Investment Company Act of 1940:

(1) ‘‘Diversified company’’ means a management company
which meets the following requirements: At least 75 per centum
of the value of its total assets is represented by cash and
cash items (including receivables), Government securities, securities
of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5 per centum
of the value of the total assets of such management company
and to not more than 10 per centum of the outstanding voting
securities of such issuer.

If you take the view that a Fund could invest theoretically up to 30% (25% + 5%) of its portfolio in any one issuer, the Sequoia Fund, which claims to be non-diversified, might not be non diversified. It looks like its largest holding is Berkshire Hathaway at 12.6%. It possible that it could have a more 10% interest in the voting shares of a stock, though.
A fund which is currently meeting the definition of diversification may have a prospectus allowing it to be non-diversified, as fund holdings change, and even when the holdings don't change, stocks gain and lose value.

Also, my understanding of the rule is that securities which are more than 5% of the fund cannot be counted towards the 75% rule at all. At one point (I think this was in 2000 at the Internet bubble peak), Vanguard Growth Index was technically non-diversified because the four largest growth stocks were each more than 5% of the index and combined for 26%.
Wiki David Grabiner

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Re: "The Fund is classified as non-diversified"

Post by SVariance1 » Wed Jul 11, 2018 7:54 pm

grabiner wrote:
Wed Jul 11, 2018 7:42 pm
SVariance1 wrote:
Wed Jul 11, 2018 7:20 am
From the Investment Company Act of 1940:

(1) ‘‘Diversified company’’ means a management company
which meets the following requirements: At least 75 per centum
of the value of its total assets is represented by cash and
cash items (including receivables), Government securities, securities
of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5 per centum
of the value of the total assets of such management company
and to not more than 10 per centum of the outstanding voting
securities of such issuer.

If you take the view that a Fund could invest theoretically up to 30% (25% + 5%) of its portfolio in any one issuer, the Sequoia Fund, which claims to be non-diversified, might not be non diversified. It looks like its largest holding is Berkshire Hathaway at 12.6%. It possible that it could have a more 10% interest in the voting shares of a stock, though.
A fund which is currently meeting the definition of diversification may have a prospectus allowing it to be non-diversified, as fund holdings change, and even when the holdings don't change, stocks gain and lose value.

Also, my understanding of the rule is that securities which are more than 5% of the fund cannot be counted towards the 75% rule at all. At one point (I think this was in 2000 at the Internet bubble peak), Vanguard Growth Index was technically non-diversified because the four largest growth stocks were each more than 5% of the index and combined for 26%.

While it is not mentioned in the ACT, the 5% test is only applied upon purchase. Lots of funds have more than 5% in a holding due to appreciation. I am convinced that most legal departments at fund companies view the 5% as relative to the entire portfolio, not just the 75%.
Mike

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Re: "The Fund is classified as non-diversified"

Post by fennewaldaj » Wed Jul 11, 2018 10:31 pm

One of the active funds I have a small stake in
Pear Tree Polaris Fgn Val Sm Cap
https://www.morningstar.com/funds/XNAS/QUSRX/quote.html
is listed as non diversified. I am actually not sure why as the funds policy is to equal weight ~ 75 stocks. Perhaps it just gives them freedom to not have to sell immediately if several of their positions appreciate a bunch at the same time.

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Re: "The Fund is classified as non-diversified"

Post by MnD » Wed Jul 11, 2018 10:49 pm

In just the plain ole website it took me about 2 minutes to find this...... Underlining added.
I've been aware of non-diversified mutual funds for decades and this one seems to fit the bill without even looking at the prospectus.

WE’RE PICKY.
We prize the outliers – the companies that define a market or dominate a niche; companies that are far superior to the average business. Most of the time, wonderful businesses trade expensively in the stock market. We try to wait for and capitalize on the rare moments when they can be purchased for a discount to their intrinsic values that incorporates what we consider the single most important concept in investing: a margin of safety. Our small collection of investments bears little resemblance to the S&P 500 or any other index. In fact, our top ten investments often account for >60% of the value of our portfolios. The S&P 500 may be relevant for assessing our performance over the long term, but it has no bearing on how we construct our portfolios.

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Re: "The Fund is classified as non-diversified"

Post by columbia » Thu Jul 12, 2018 5:58 am

Classic case of you’d better have a REALLY good reason to deviate away from total market/SP500. Results since January 2015:

https://www.portfoliovisualizer.com/bac ... tion2_2=10

Not pretty.

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