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Portfolio Overlap

Mutual Funds

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A downside of investing in funds is portfolio overlap, extending from a lack of control over investments within a fund. Portfolio overlap occurs when multiple funds within your portfolios own the same investment. A fund that invests worldwide may hold some of the same bonds as a domestic mutual fund and emerging market funds. A generalized domestic fund may own some of the same equities as several sector funds. These are fund overlaps. It also occurs if you own an individual investment that your mutual funds also own.

If the overlapping bonds or equities crash in one fund, they will crash in all funds. They will also crash in your investment portfolio if you own them individually. The entire reason for investing in sector, geographic, or development specialized funds is to avoid overlapping investments. You do not want your funds to own the same investments as each other or your individually owned assets. Portfolio overlap increases correlation and erases the diversification benefit.

These issues are directly related to your lack of control. You cannot order fund managers to sell shares that overlap with your other investments. They are not going to sell investments to ensure you don’t own overlapping holdings. You will have to sell investments in your personal portfolio or the fund itself. You can avoid this situation by researching the fund’s top investment holdings. It is wise to pass on funds that have substantial investments you own individual or via other funds. Use the fund’s investment documentation to ensure that your investments and funds are not highly correlated with one another.

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