"Building a Focused Fund of Your Own"

This is the title of an article (subscription required) in the September 12 issue of BusinessWeek written by Lewis Braham. The author writes that there are quite a few focused funds that are actually less volatile than the broad market. The article also has some quick quotes from the fund managers mentioned, about how they do this.

The topic of this article is great but as a function of space there is not the type of detail I would hope to see. The most useful quote, in my opinion, was one from Tom Marsico that said although Genentech (DNA) and Zimmer Holdings (ZMH) are both health stocks that they tend to "react differently to market conditions."

After reading the article I thought it would be worthwhile to cover a couple of things to explore do-it-yourself portfolio construction. Several managers are quoted for their opinions about what level of attention is need to maintain a stock portfolio. Some of it made sense to me and some did not.

I try to construct the portfolios I manage to be less volatile than the market most of the time. There are points in the stock market cycle where more volatility makes sense, but not lately.

The following is a breakdown of sorts of the equity portion for a very client account ordinary account.
Financials
Domestic bank
Three different foreign banks
Healthcare
Medical services
American pharma
Foreign pharma
Medical devices
Foreign generic drug
Biotech
Tech
Computer company
Networking
Two internet stocks
Semiconductor
Industrial
Big equipment
Foreign vehicle
Big cap defense
Mid cap defense
Big cap conglomerate
Energy
Two foreign integrated
Big Chinese company
MLP
Materials
Foreign gold stock
Chemical company
Timber company
Emerging market resources
Telecom
Foreign high yielding
Domestic high yielding
Utilities
Two high yielding
Consumer
Foreign staples
Domestic staples
Specialty retailer
Broad retailer
Drug store
Other
REIT
Emerging market country fund

This account has 39 equity holdings. The names are not the important thing here. What is important for this post is that you can get a feel for how I try to create diversity with each sector. Within each sector there is, hopefully, very little overlap or at a minimum multiple effects captured.

I should note this account does not own every stock in my ownership universe, also this client has no special circumstance or requirements that would make it unique.

Of the holdings listed, there are only two ETFs and one CEF. More often than not I think an individual stock is the best way to capture a particular effect. Where it isn't, I use the tool that is best, for me. This applies to you as well.

For example my first choice for utilities exposure is common stock. You may feel, for your portfolio, an ETF is better. A recurring theme here is to make use of all tools available to build a portfolio that is right for you.

The account above has, as I mentioned, 39 holdings. Obviously I think diversification can be captured with this many stocks. It makes sense to me that not every do-it-yourselfer would want to keep tabs on this many stocks. I would add, though, that if you use an ETF to substitute for a sector you do need to stay up to date with the sector. This is probably easier than staying informed with three or four stocks, but needs to be done nonetheless. For example Citigroup makes up 10% of the Financial Sector SPDR (XLF). If you own XLF to capture the sector, it might be worth your time to be somewhat in touch with Citi, as an example.

Things like ETFs and CEFs can make the job easier but aren't green lights for no work either.