Beware of fund concentration risk

It’s always good to see the Financial Services Authority (FSA) highlighting a risk which investors (and their advisers) should have been aware of and acting on for years.

Better late than never.

According to a report in Investment Week, the FSA is planning to focus on advisers and wealth managers who place large amounts of money in a single fund.

When a large percentage of assets under management are placed in a single investment fund, investment strategy or asset class, the risk to investors can be substantial.

Should a fund go wrong, as we have seen in a few examples in recent years, investors with a high proportion of their portfolios exposed suffer to a greater extent.

Diversification is important here.

There is rarely a need to invest more than a small amount in a single fund, strategy or asset class. By investing across multiple funds with different underlying asset allocation, risk is effectively managed and reduced.

Where more than 20% of an investment portfolio is invested in a single fund or asset class, investors should be asking serious questions of their advisers about processes to avoid unnecessary risks.

Photo credit: Flickr/Paul Lowry