International concentrated funds outperform diversified

International share funds with a concentrated approach have outperformed their diversified counterparts, in the 12 months to 30 September 2016, according to ratings agency, Zenith.

Zenith Investment Partners' international share sector review found that 70 per cent of the concentrated funds (which held less than 75 stocks) outperformed the MSCI world ex-Australia index.

The review also found that only 55 per cent of funds with greater diversification generated excess returns.

Senior investment analyst, Quan Nguyen said contrary to the belief that concentrated funds had higher volatility, Zenith found that they actually had less volatility.

"The volatility of the concentrated funds was marginally lower than that of the more diversified funds over the long-term," Nguyen said.

One of the key attractions to concentrated funds was that they contained a manager's best ideas, according to Zenith. Portfolio construction was also typically done without regard for the benchmark.

"Whilst on average, concentrated funds have performed better, the difference between the best and worst can be significant. As a result, Zenith continues to advocate the use of concentrated funds as part of a diversified international shares portfolio rather than as a standalone allocation."

Zenith's review was based on a universe of 175 products.