Diversified Fund Reality Check

The holdings count is the wrong number

A fund holding five hundred companies sounds diversified, and the count is the figure every factsheet leads with. It is also close to meaningless on its own, because the weights are not equal. In a capitalisation-weighted fund the largest positions can carry a multiple of the smallest ones, and the tail of small weights contributes almost nothing to how the fund behaves.

What matters is not how many lines the fund holds but how many of them actually drive the result. That question has a standard answer, and it is not the holdings count.

Effective holdings, and the HHI behind it

The tool computes the Herfindahl-Hirschman Index on the fund's holding weights: the sum of the squared weights, scaled so that a single-holding fund scores 10 000. Squaring is what makes the measure useful, because it gives a position weighing 8 % sixty-four times the influence of one weighing 1 %, which is the right ratio for a concentration question.

From the index comes the number that reads more naturally: the effective number of holdings, which is 10 000 divided by the HHI. It answers "this fund behaves as though it held N equally weighted positions". A fund with five hundred lines and an effective count in the low dozens is not diversified in the way its factsheet implies, and the gap between the two numbers is the whole point of the tool.

The result is labelled on a four-step scale calibrated for fund holding weights, from low through moderate and high to very high. The thresholds sit at 200, 400 and 800 on the index. A broad Nasdaq-100 tracker lands around 300, already meaningful concentration for something sold as a diversified holding.

The combined weight of the ten largest positions is shown alongside, because it is the figure most investors already have an intuition for, and the five largest sectors, because concentration frequently hides in a sector rather than in a single name.

What concentration is and is not

A concentrated fund is not a bad fund. Concentration is a description of the exposure, not a verdict on it: a deliberately concentrated sector fund is doing exactly what it says. The problem is only ever concentration that was not intended, in a product bought for diversification.

The measure looks at holding weights and nothing else. It does not know whether the largest positions are correlated with each other, and two funds with the same effective count can behave very differently if one of them concentrates in a single industry.

The figures move with the underlying holdings and with their publication schedule. They are a snapshot from a daily-refreshed cache, not a live view of the fund.