Conviction Funds Offer Greater Rewards

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    The risks of investing in conviction funds might be greater, but so too are the potential rewards, says Cerulli Associates. It says with the surge in passive investment set to continue, conviction funds (funds of quality stocks left unmonitored for periods of time) represent the opposite end of the spectrum, offering an attractive alternative to “closet trackers” masquerading as active funds. While tracker funds are investing in hundreds of stocks, a conviction fund chooses a relatively small number of holdings, often less than 30, and stays with them for longer. They tend to outperform, it says. However, while one criticism of conviction funds is that they are higher risk, the risk may lie in having too many holdings. Those with the necessary research capabilities, either because they are part of a big team or are operating in a niche with specialist knowledge, can reap the benefits of the perceived mediocrity of the others, by going into the conviction space.