How You Can Avoid Overlap
To avoid duplication, you may want to consider some of Morningstar's guidelines for addressing overlap when building your portfolio.
1. You may not want to buy multiple funds run by the same manager. Zebras don't change their stripes, and managers often gravitate to the same stocks for multiple portfolios. Some fund managers have ingrained investment habits they apply to every pool of money they run, so, if you own two funds by Famous Manager A, chances are they may own two of the same thing. On the other hand, there can be benefits to buying within the same fund families or same fund managers. If you choose funds with an up-front sales charge, you have the potential to save money on transaction fees by buying within the same fund family. Fund families also typically allow you to switch from one fund to another without charging an exchange fee.
2. You may want to avoid overloading on one boutique's funds. Some fund families offer a lineup of funds that span a variety of investment styles. Other shops, called boutiques, prefer to specialize in a particular style. Boutique families may be excellent at what they do, but it's questionable whether owning three of their funds will give you anything you won't get with one.
3. You can take the “four-corners” approach. The Morningstar style box, available in Scottrade Portfolio Manager, can be a diversifier's best friend. When buying stocks, you may want to diversify your picks among the different style boxes. When buying funds, the style box will not only tell you whether a fund's manager is snapping up large-value stocks, but it can also lead you to funds that bear little resemblance to one another.
Value funds don't act much like growth portfolios, and small-cap funds behave differently from large-cap offerings. In style-box lingo, opposite corners attract. If you own a large-value fund from your favorite fund company, you may also want to try one of its large-growth, small-value, or small-growth offerings.
Don't assume that your portfolio's weightings must be evenly dispersed across the style box, though. Although the U.S. market has a fairly even distribution across value, blend, and growth investing styles, large-cap stocks make up roughly 75% of the value of the U.S. market.
4. You may want to manage sector weightings. If your portfolio already holds one major oil company, and you're considering buying another stock, perhaps a financial services or healthcare stock would provide better diversification than a different oil company. Similarly, if two funds from the same category sport similar sector weightings, you may own many of the same stocks.
5. You should determine how much overlap you have. If you've followed these guidelines and put together a portfolio of investments or possible investments, test for overlap with Scottrade Portfolio Manager.
Read Next: Identify Overlap with Scottrade Portfolio Manager
Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund (ETF) or mutual fund carefully before investing. A prospectus contains this and other information and should be read carefully before investing. A mutual fund prospectus is available through www.scottrade.com or through a Scottrade branch office. An ETF prospectus must be obtained from the issuer.