When Diversification Doesn’t Tame the Ride

Investors often assume that spreading assets across many names means a smoother ride. A low concentration in a fund’s top 10 holdings looks reassuring—no single stock can sink the ship.

But diversification across securities doesn’t guarantee low risk. A portfolio can hold hundreds of positions and still swing wildly if those names share a common tilt toward smaller, cheaper, or more speculative corners of the market.

Let’s look at three funds that keep relatively little in their top 10 holdings yet still deliver a bumpy ride.

First Eagle Small Cap Opportunity FESAX keeps just 8% of assets in its top 10 names and spreads money across roughly 240 positions. Yet, its three-year standard deviation of 21.1% tops both the small-value Morningstar Category average and the Russell 2000 Value Index, and it lands in the riskiest 4% of the category on the five-year Morningstar Risk percentile rank. That’s no coincidence: Lead manager Bill Hench built this strategy in the same contrarian mold he used at Royce before joining First Eagle in 2021.

Hench stashed roughly 63% of assets in micro-caps as of August 2026, dwarfing the typical peer’s 19% stake, and the strategy captured 170% of the market’s downside over the trailing three years. Moreover, the fund has big overweightings in industrials and technology.

Vanguard Selected Value VASVX holds 100 to 160 stocks with just 15% in its top 10 holdings, and its three subadvisors—Pzena, Donald Smith & Co., and Cooke & Bieler—are there in part to diversify style exposure. In practice, the blend still lands in the riskiest quartile of the mid-cap value category on the five-year Morningstar Risk rank.

Donald Smith’s concentrated, contrarian sleeve has piled up sector bets over the Russell Midcap Value Index as large as 20 percentage points in materials and 17 percentage points in financials. That sleeve has driven most of the fund’s recent outperformance, but it also pushed the whole portfolio’s three-year standard deviation through August 2026 about 2 percentage points above the benchmark and typical peer, and the fund has tended to fall further than both in drawdowns of 10% or more.

LSV Small Cap Value LVAQX keeps just 16% of assets in its top 10 holdings and spreads picks across a 200- to 300-stock portfolio built from a systematic deep-value model. Yet, in the past three years, the strategy has been more volatile than over 70% of its small-value peers. The fund trailed the Russell 2000 Value Index by more than 12 percentage points between February 2020 and February 2021, then turned around and beat it by 11 percentage points over the following year.

The model targets stocks that the market has left for dead and are cheap on price/earnings and price/cash flow. While the team avoids piling into unprofitable companies, the portfolio tends to hold more leveraged balance sheets than the index, which can contribute to price swings. Sector bets have also ranged as wide as twice the index’s weighting or half the index’s weighting, even though current allocations look tame.