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Santoli: Valeant gives concentrated funds bad name

Bill Ackman at the New York Stock Exchange.
Brendan McDermid | Reuters
Bill Ackman at the New York Stock Exchange.

Almost as soon as the Valeant Pharmaceuticals crash buried several celebrated fund managers, the gleeful mockery of their hubris came wrapped in a scolding lesson about their supposed errors: "This is what happens when a fund is too concentrated in a few names," the didactic investment experts tut-tutted.

There's no doubt that Bill Ackman's Pershing Square, Jeffrey Ubben's ValueAct Capital and the Sequoia Fund invited danger when they each allowed Valeant to grow to 10 percent or more of their portfolio.

Yet it would be wrong for investors to conclude that these funds' struggles invalidate the strategy of running a focused fund containing a small number of high-conviction, rigorously studied stocks. In fact, owning a lean group of companies, and tracking them closely, is one of the only ways to justify even trying to outperform inexpensive, passive index funds.