You can't time the market. But maybe you can increase your upside or limit your downside with a concentrated fund.

Anyone watching the market knows that a mere handful of stocks have accounted for most of the gains in recent years. It isn't a novel phenomenon. In fact, it has been true for at least a century. And that fact should make many investors take another look at their stock fund strategies.

From January 1926 through December 2025, just 46 stocks-out of 29,754 common stocks listed on the public U.S. stock markets over that period-accounted for half of the $91 trillion in net wealth creation, according to a study published in March titled "One Hundred Years in the U.S. Stock Markets." Worse, the median buy-and-hold return for all those stocks was minus 6.9%.

The study's author, Hendrik Bessembinder, a professor of finance at Arizona State University's W.P. Carey School of Business, calls people's reaction to his findings a "Rorschach test" of their investment styles. "For the large majority of investors, the evidence just strengthens their view about the desirability of a well-diversified, low-cost portfolio without a lot of trading," he tells Barron's. "My evidence says if you pick 10 stocks at random, most likely you're going to underperform."

Yet other investors are looking for a big hit. "The chances of getting a 100-bagger are much better if you pick one or two individual stocks and try to find the next Amazon.com as opposed to buying the whole basket," Bessembinder says. This group either does their own stock-picking or hires skilled money managers who hold a concentrated portfolio of just a few hoped-for outperformers.

Core and Explore

Vanguard Group founder Jack Bogle argued against searching for needles in a haystack in favor of "buying the whole haystack" with a broadly diversified index fund. Yet searching for a few needles with a top focused-fund manager can help amplify returns in the good times or buffer a largely indexed portfolio in the bad.

"It isn't an either/or decision," says Jason Subotky, co-manager of the AMG Yacktman Focused fund. "You could be largely indexed, but then still have exposure to the managers that you know are doing something to add value significantly."

Such a strategy is known as "core and explore" on Wall Street.

"If you look at the lost decade from the end of the 1990s to the end of 2009, that's what really helped people discover us because we were able to generate very strong returns against an index for the S&P 500 that went nowhere," Subotky says.

From Dec. 31, 1999, through Dec. 31, 2009, Yacktman Focused gained a cumulative 206% while the Vanguard 500 Index fund lost 2%, according to Morningstar. Then again, if you look at Vanguard 500 from Dec. 31, 2009, until today, it gained 832% versus Yacktman's 569%. Clearly, there are advantages to owning both funds, although it's notable that Yacktman won over the entire period, up an eye-popping 1,944% versus the S&P 500 fund's 811%.

Then there is the question of how to index. While the largest companies have recently outperformed, that hasn't always been true. "For most of history, buying the largest stocks has been a notably bad investment," Bessembinder says. If it's impossible to predict which stocks will win in advance, a better index strategy might be to equal-weight stocks instead of piling into the largest ones, as market-cap weighted indexes like the S&P 500 do. A few focused funds paired with an exchange-traded fund like Invesco Russell 1000 Equal Weight could be one way to square the circle.

High Quality

An index fund core helps because focused-fund returns tend to be "lumpy": Even the best funds often have bouts of underperformance followed by dominant periods. But the worst funds can be extraordinarily volatile from being too concentrated in risky companies. (For this article, we define "focused" as funds with 50 stocks or fewer.)

Good focused funds tend to have one factor in common-a penchant for high-quality companies with strong businesses and clean balance sheets. "We generally talk about quality companies that have staying power," says Tom Hancock, co-manager of the GMO U.S. Quality ETF, which currently holds 43 stocks. These are businesses he can picture being "relevant and vibrant five to 10 if not 100 years out."

GMO's $5 billion ETF, which launched in 2023, is similar to its older institutional-only mutual fund, GMO Quality, which has beaten the S&P 500 index and 94% of its peers in Morningstar's large blend category with a 16.1% 10-year annualized return.

Although valuations matter to Hancock, he subscribes to Warren Buffett's philosophy that it's better to buy a wonderful company at a fair price than a fair company at a wonderful price. "If you're thinking with a long time horizon, the entry-point [valuation] doesn't really matter as much," he says.

Hancock holds different buckets of stocks. There are quality growth stocks like Microsoft and Alphabet and core quality "stable ballast" ones such as Johnson & Johnson and Procter & Gamble. (Quality value refers to temporarily out-of-favor companies in cyclical industries.)

Some companies shift from one category to another. Software names Accenture and Salesforce are now considered value stocks. "Two or three years ago, we would have called those uncontroversial growth companies, and today they're under a big cloud," Hancock says. He calls the threat to them from artificial intelligence "overblown."

Core Focused

Because value and growth styles go in and out of fashion, a focused fund ideally should incorporate both strategies, as does GMO's ETF, so returns are less lumpy. The JPMorgan Equity Focus ETF typically invests in the 20 best large-cap ideas from J.P. Morgan Asset Management's growth team and 20 from its value team, and tilts the portfolio slightly toward growth or value in different market environments. Manager Felise Agranoff runs the growth side of the portfolio and Jack Caffrey the value. Both have over two decades of experience at J.P. Morgan and work with some 50 analysts and another co-manager, Graham Spence, to research companies.

Having such a deep analytical bench gives Agranoff the confidence to invest 9% of the fund's portfolio in AI chip maker Nvidia. "Our views on Nvidia have evolved over time," she says. In 2023, when the ETF purchased the stock, "we were extraordinarily bullish because we felt the market underappreciated both the magnitude and duration of spend around generative AI and Nvidia's dominant position." Since then, based on valuations and the competitive outlook from rivals like Broadcom, she has adjusted her position, adding to it recently as the stock price came down.

Although the ETF can tilt toward value, as it did in early 2026, Caffrey tends to hold smaller individual positions. Value stocks are more cyclical than growth ones, so being too exposed to any individual one could be riskier. Still, in economically sensitive sectors, he holds the highest-quality names like Morgan Stanley in financial services and ExxonMobil Holdings in energy.

Focused Growth

While a core focused fund offers balance, if you want that "100-bagger" stock, you could tilt toward a growth or value fund depending on market conditions. No question, the Alger Focus Equity mutual fund and its newer companion ETF, Alger Concentrated Equity, have been on fire lately.

Alger Focus Equity, with just 42 stocks and a 47% tech weighting, has beaten 97% of its peers in the past 10 years with a 21.7% annualized return. It is run by co-managers Patrick Kelly and Ankur Crawford, while Alger Concentrated Equity holds 30 stocks and is run by Crawford alone. Launched in 2024, the ETF has a lower 0.56% expense ratio, but a higher 14.8% Nvidia weighting versus the mutual fund's 12%.

Yet Crawford isn't afraid of drilling down into lesser-known names. The ETF holds shares in three private companies: Anthropic, Figure AI, and VAST Data. "Figure AI is one of the leading humanoid companies in the U.S., and we're just at the very beginning of the humanoid revolution," she says. "The use of robots is going to allow us to have an industrial renaissance in the U.S." (Depending on how utopian or dystopian your outlook is, you can see how exciting or creepy Figure AI's humanoids are in its promotional video.)

Focused Value

Still, one should expect more lumpiness with such a tech-heavy fund. In 2022's bear market, when highly valued growth stocks crashed, Alger Focus Equity fell 36.0% compared with the average large-growth fund's -29.9% and the S&P 500's -18.2%.

The PGIM Jennison Focused Value and Putnam Focused Large Cap Value ETFs have a more balanced approach toward concentration. Neither takes big sector bets against their Russell 1000 Value benchmark, which recently held 21% in tech. Although value stocks in general did better in 2022, Putnam Focused Large Cap Value stood out, with only a 2.6% loss, while PGIM Jennison Focused Value's parent mutual fund, which will merge with the PGIM ETF in November, lost 11.1%.

Neither fund is what one would call a deep value or classic value fund because of their emphasis on high-quality stocks. Both portfolios have average price/earnings ratios around 17. That's less than the S&P 500's 20, but higher than the long-term average 16 P/E for stocks in an already pricey market.

Contrast that with AMG Yacktman Focused's 12.6 average P/E or Davis Select U.S. Equity's 12.8 P/E. But you have to accept the lumpiness. Subotky and manager Stephen Yacktman say they held their top AI stock darling, Samsung Electronics, for about a decade before it did much of anything.

Meanwhile, Davis Select manager Chris Davis' largest position, Capital One Financial, has sunk recently because investors are worried about the integration of its most recent Discover acquisition and exposure to subprime debt. But Davis thinks the company's true value in an AI-besotted market is misunderstood. "Capital One is the original and most successful fintech company," he says. "It was started as a data science company and is run by data scientists. It's in the top 10 of all companies for holders of AI patents and machine learning patents."

Such a technological edge makes it a better credit-card lender than competitors, Davis argues. "Financial services companies are basically in the business of pricing risk," he says. "The better you use information and data, the better you can price risk."

Small-Caps

The greater the real or perceived risk in a company, the more volatile the returns. Some might argue that for cheaply valued companies with some warts, it is better not to be so concentrated. Meb Faber typically holds 100 stocks in his deep-value ETFs Cambria Shareholder Yield and Cambria Global Value, which have been strong but volatile long-term performers. He argues that his ETFs are concentrated because they differ greatly from most large-cap U.S. stock funds by holding smaller, cheaper, and often foreign companies. "If you're going to charge more than zero, you'd better be concentrated in different stocks," he says. But holding 20 stocks in his style would "introduce a ton of variability" in returns.

Value stocks tend to have smaller capitalizations than growth ones because they have been beaten up. But any small stock can prove too volatile for extremely concentrated portfolios. Morningstar categorizes Paradigm Select as a mid-cap blend fund, but it has almost half its 50-stock portfolio in small and microcap stocks. "I don't want to be overconcentrated," says Amelia Weir, who co-manages the fund with her mother, Candace Weir. "Sometimes you have to let your winners run, but I'd say 50 to 60 stocks" is ideal.

In a perfect world, no single position would get above 5%, Weir says. But one reason the fund is in the mid-cap range now is that its AI-related stocks like Lumentum Holdings and Marvell Technology have done so well, up 473% and 203%, respectively, in the past year. Lumentum is now almost 8% of the fund.

Therein lies the conundrum for a concentrated fund manager: You don't want to own too much in a volatile stock, but you never know if you might own the next Amazon.

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