That depends on how you define raisin.
There has been a significant increase in the number of exchange traded funds (ETFs) offering a focused emphasis on current fashionable investment themes. While a diverse portfolio may offer the best long term results, many investors, at least with part of their portfolios, are seeking opportunities to concentrate on very specific investments, such as space exploration, renewable energy, and self-driving vehicles, to mention a few.
The problem is that the more focused, the less the supply of publicly traded investment opportunities. As money pours into new and existing funds, there simply isn’t enough market capitalization that can meet a tight definition of the stated criteria to meet the demand. Since the fund manager gets to define the qualifications that meet the purported objectives, some clearly absurd definitions have proliferated.
For example, if a fund manager promises a high percentage of companies emphasizing self-driving vehicle technology, prospective investors are likely to assume that a high percentage of portfolio assets will be in self-driving technology, but where do the fund managers find the advertised investment opportunities. The number of public companies that are primarily engaged in developing self-driving applications is very limited. Consequently, fund managers tend to include diversified, large capitalization companies, even though their participation in self-driving is very small, as a percent of their primary business model.
ETF portfolio holdings are readily available. The fund manager picks the stocks, but prospective investors can decide how much of the portfolio actually meets the investor’s definitions. Hence, the answer to how many raisins are in a box of raisin bran is up to the beholder. The fund manager may decide that GM’s work on self-driving may qualify it as a raisin. You may disagree.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA®