A golden rule of investing is not having everything in one basket so you’re not caught out if something goes wrong with one of your holdings. But a less discussed point is how to do it and how doing it effectively can really save you money.
Ultimately when it comes to diversification what matters is not how many funds you hold, but their underlying holdings.
Someone could hold 20 different funds, but if they are all focused on, say, the US, they could likely have large stakes in the same companies. So, the investor ends up paying charges and dealing fees across a variety of funds for similar products, instead of whittling that group down to just a few which have different holdings. They also will still not have regional diversification, meaning that if something went wrong in the US market, it could result in a more damaging loss.
This is also commonly seen in multi asset funds. Investors may look at a range of multi asset funds and decide to choose two: one with a high equity exposure, and another one in the range with a focus on bonds. Often there would be an option in the middle of that range which combines the exposure of those two funds, meaning reduced dealing charges.
Knowing what to simplify
Diversifying your portfolio in the most effective way means having a peak under the bonnet to see what you are really hold.
The easiest place to start is with your tracker funds. These funds operate by copying the exposure in an index, like the FTSE 100. So, every fund that tracks that index will hold near identical exposures. If you have multiple funds which track the same index, this is effectively duplicating your exposure to one area.
These funds may have slightly different charges and performances, and by choosing the one that suits you best, you could save on dealing fees. For example, let’s say an investor, Lou, holds three different funds that track the FTSE 100, and puts money into each once a month. For each transaction, at AJ Bell, he’d pay a £1.50 dealing fee, so each month, he pays £4.50. Over a year, this equates to £54. If he instead selected just one of these very similar tracker funds, Lou’s yearly dealing costs would instead be £18.
If you do find overlap of funds tracking the same index, you can use fees and past performance to help evaluate which one suits you best. Past performance isn’t a guarantee of the future, but in the case of index funds, it may give you an indication of how well the fund has been able to track the index. Some funds are set up in such a way they can even outperform their index, giving you an extra boost.
The fees charged by fund providers can also make a big difference. For example, two FTSE 100 tracker funds, which follow the same index, have ongoing charges of 0.5% and 0.1% respectively. This seems small to begin with, but what about over time? Let’s imagine £10,000 was invested in both funds that had the exact same 5% annual return over 10 years, before fees. The assets in the fund with the 0.1% charge would expand to £16,307 while the assets in the 0.5% fund would grow to just £15,670.
Even if funds track different indices, it’s worth seeing how different those indices really are. For example, funds tracking the MSCI World and the FTSE All World have the same top 10 holdings, with similar weightings in these companies. If an investor is holding these two funds to gain diversification, they aren’t really getting it.
Is active exposure adding to your diversification?
One way some investors choose to diversify is by holding some of their money in actively managed funds. In theory, this should offer some level of diversification, because the managers are hand picking stocks for the portfolio. But it is worth digging a bit deeper to ensure the funds are really giving you something unique.
Fund managers often have pressure to at least meet the performance of an index, and when a single company is driving a significant amount of the returns, many might flock to this same holding. For example, nearly 10% of the funds in the Investment Association Global sector have at least 3% of their assets in Nvidia.
You can get an idea of what a fund is holding by looking at its Morningstar fact sheet, which can be found on the information page for each fund when you use the AJ Bell fund screener.
Last year, three of the top four most-purchased active funds or trusts invested globally. This of course gives them a large universe of stocks to choose from. However, the table below shows how much of their allocation was focussed on the US, and how many of the top 10 holdings overlap.
This isn’t to say that any of these are bad choices, and in fact, all had strong performances last year. There are some unique features of each fund. For example, Scottish Mortgage Trust, for example, has Space X, which is not yet accessible to the public market.
JPM puts a focus on income as well as growth, and F&C Investment Trust holds two private equity investments in its top 10. If an investor is looking for a mix of income and growth in their portfolio, and wants private equity access, holding all these funds might suit them. However, for investors who are choosing these funds to gain exposure to a broad spread of the global market, it’s worth considering the overlap.
To assess your own portfolio, you can use the X-ray feature inside your AJ Bell account. This will show you your largest holdings, sectors, and regions across all your funds and stocks. Starting here can give you a clear picture if a reassessment of allocation is needed, or if you’re happy with your balance.
Hannah Williford: Content Writer
Hannah joined AJ Bell in 2025 as an investment writer. She was previously a journalist at Portfolio Adviser Magazine, reporting on multi-asset, fixed income and equity funds, as well as macroeconomic impacts and regulatory changes...
