Laser fund is a relatively new term in the investment world. As the name suggests, it refers to funds that invest in a very concentrated portfolio, typically with 10 or fewer stocks. The logic is that by investing in only a handful of companies that they have researched extensively, fund managers can achieve better returns than a more diversified portfolio. In recent years, some laser funds run by star stock pickers have delivered exceptional returns, sparking interest from investors. However, laser funds also carry higher risks due to lack of diversification. In this article, we will explore what laser funds are, how they work, their risks and returns compared to other funds, and whether they deserve a place in a balanced investment portfolio.
laser funds invest in a concentrated portfolio of stocks
The defining characteristic of laser funds is their concentrated portfolios. While most mutual funds hold at least 50-100 stocks, laser funds typically own 10 or fewer stocks. For example, the Chase Growth Fund, run by top performing stock picker Bill Chase, owns just six stocks. The idea is that by conducting rigorous research on a small number of companies, fund managers can gain an informational edge and pick the very best stocks. Unlike traditional mutual funds, laser funds don’t bother owning positions in dozens of companies just for the sake of diversification.
laser fund managers are very high conviction stock pickers
Laser fund managers have deep conviction in their stock picking abilities. Most see broad index funds or traditional actively managed funds with 50+ stocks as over-diversified. They believe meaningful outperformance comes from putting your biggest dollars behind only your very highest conviction ideas. Laser fund managers spend an extraordinary amount of time analyzing the few stocks they select, developing financial models, speaking with management teams, and assessing competitive threats. For example, Chase has said he may spend 500-1000 hours analyzing a stock before he buys it for his fund.
laser funds can produce market-beating returns but carry risks
The past decade has seen a crop of laser funds deliver phenomenal returns well above market benchmarks. Chase Growth Fund has returned over 18% annualized the past 15 years, more than doubling the S&P 500. Some argue that the flexibility to take large positions in just a few stocks gives laser funds an inherent performance advantage over more constrained peers. However, the concentrated approach comes with significant risk. Just one or two bad stock picks can greatly impair returns in a 10 stock portfolio in a way that is unlikely for a more diversified fund. Additionally, many past top-performing laser funds benefited from a long bull market run.
laser funds warrant consideration but require caution
For risk-tolerant investors, laser funds can be a tool that may boost overall returns. The best funds are run by veteran stock pickers with proven records. However, investments should be made with eyes wide open about potential volatility and drawdowns. Constraints should be put on laser fund position sizes for most investors. 10-20% of a stock portfolio could be allocated to laser funds, with the rest in index funds and more diversified active funds. Laser funds can provide concentrated bets on truly exceptional stock pickers’ highest conviction ideas.
In summary, laser funds are concentrated stock picking vehicles run by managers who believe meaningful outperformance lies in making huge bets on just a handful of rigorously researched companies. While the flexible approach has led to market trouncing returns for some laser funds, the strategy carries enhanced risk that warrants caution by most investors.