Many of the best investors in the world do not believe in diversification. Investors such as Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio) believe the best way to approach a portfolio is to invest as much as possible into the businesses one understands the best.
This is a sensible approach in some cases, but for inexperienced investors, it can be a quick way to lose a lot of money.
One should only follow this approach if one is entirely comfortable with large drawdowns and is willing to do the work required to understand every company on a granular level.
That said, I thought it might be interesting to look at hedge fund positioning and see which firms follow this approach.
Because I don't have granular detail on returns available, this is not designed to guide whether or not this is the right approach. I'm only highlighting hedge fund positions based on the available information in 13F reports.
These reports do reveal one fascinating trend, however. It seems the investors most likely to take significant positions in one single equity are value investors.
Concentrated value investing
David Einhorn (Trades, Portfolio)'s Greenlight Capital has 34% of its portfolio invested in Green Brick Partners Inc. GRBK. The fund manager started acquiring this position in the fourth quarter of 2014, and it has become the most significant position in the portfolio. However, the number of shares acquired peaked at 24.1 million in the second quarter of 2015, implying the size of the position has increased relative to the overall portfolio as assets under management have fallen.
Still, the fact that the fund manager has maintained this position at more than a third of his portfolio shows the conviction.
Another value investor with a significant allocation to one holding is Prem Watsa (Trades, Portfolio).
Watsa's financial conglomerate, Fairfax Financial Holdings FFH, has allocated 48% of its equity portfolio Atlas Corp. ATCO, the global infrastructure business, which counts former Berkshire Hathaway BRK.A BRK.B director David Sokol as one of its directors.
Talking Berkshire, the largest single equity allocation in the equity portfolio of Buffett's conglomerate is consumer electronics group Apple Inc. AAPL. At the end of December 2020, this position had a 43% weight in Berkshire's equity portfolio.
I have used the term "equity portfolio" with Fairfax and Berkshire as both companies have businesses outside their portfolios of equities. Therefore, while these allocations might look significant compared to other equity holdings, they may be insignificant to other investments across the group.
Moving on, the largest position in the Daily Journal Corp.'s DJCO portfolio, which is managed by Buffett's right-hand man, Munger, is Bank of America Corp. BAC. This position had a near 56% portfolio weight at the end of 2020.
Micron Technology Inc. MU was a favorite of both Mohnish Pabrai (Trades, Portfolio) and Li Lu (Trades, Portfolio), according to the most recent 13Fs of their respective funds. I should note these reports only detail U.S.-listed investments, and we know that both of these investors have significant overseas equity portfolios. Therefore, the equity weightings listed in 13Fs will not show the whole picture.
That being said, we can still gain something from these reports because it is notable that an investor would have the entire U.S. equity market of more than 3,000 stocks to choose from, and only pick one or two.
At the end of 2020, Micron made up 66% of Pabrai's U.S. portfolio and 48% of Li's. These value investors have the most concentrated equity portfolios. Hedge fund managers with a growth slant don't shy away from concentration entirely, although the weightings tend to be much lower, 10% or less.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Why I Sold Wells Fargo
- Why Hedge Funds Are Piling Into SPACs
- Hedge Fund Buys and Sells: Notable Trends
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