Since inception of the Small Cap Long-Only Strategy, we have held an average of 32 businesses in the portfolio. We believe that there is a time and place for making concentrated investments and, today, our top two positions account for approximately 30% of the fund’s assets, with the top ten positions accounting for 64%.
The number of positions that we own is a function of the availability of ideas by thesis type. We usually make concentrated investments in ‘compounders’ (great businesses and great capital allocators), while some cheap asset investments may warrant a basket approach, translating to lower individual weights. As a result, when ‘compounder’ ideas that meet our return hurdles are plentiful, the portfolio will tend to be more concentrated. Conversely, expect more businesses in the portfolio when more attractive cheap asset ideas are available.
We do not believe that concentrated portfolios are inherently more likely to produce superior performance and we do not believe that extreme concentration is desirable all of the time. Our observation has been that some managers who advertise their funds as running a concentrated portfolio, often do so to attract capital and not necessarily to maximize the returns for their clients.