# Reclassify fund as non-diversified

**URL:** <https://boards.straightdope.com/t/reclassify-fund-as-non-diversified/931622>\
**Category:** Factual Questions\
**Created:** [January 27, 2021, 5:43pm UTC](https://boards.straightdope.com/t/reclassify-fund-as-non-diversified/931622 "2021-01-27T17:43:47Z")\
**Posts on this page:** 5\
**Page:** 1

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**Author:** ![PoppaSan](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/poppasan/32/189_2.png) [@PoppaSan](https://boards.straightdope.com/u/PoppaSan)\
**Post date:** [January 27, 2021, 5:43pm UTC](https://boards.straightdope.com/t/reclassify-fund-as-non-diversified/931622/1 "2021-01-27T17:43:47Z")

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I recently received a letter from my 401k firm with the following statement:

> [@](#):
>
> Shareholders of the following funds approved a proposal to reclassify each fund as “non-diversified,” as defined by the Investment Company Act of 1940: …snip…

What does this mean if I were in one of the funds?

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**Author:** ![What\_Exit](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/what_exit/32/10652_2.png) [@What\_Exit](https://boards.straightdope.com/u/What_Exit)\
**Post date:** [January 27, 2021, 5:54pm UTC](https://boards.straightdope.com/t/reclassify-fund-as-non-diversified/931622/2 "2021-01-27T17:54:01Z")

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**A summary:** A non-diversified fund means the fund can put the majority of its holding into one industry. Like The _Acme Tech Fund_ could be 64% Tech companies or _Allied Mining_ is 83% Mining Companies and Petroleum. The fund is still restricted to \<=5% in a single company though.

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**Author:** ![Tired\_and\_Cranky](https://avatars.discourse-cdn.com/v4/letter/t/a87d85/32.png) [@Tired\_and\_Cranky](https://boards.straightdope.com/u/Tired_and_Cranky)\
**Post date:** [January 27, 2021, 9:14pm UTC](https://boards.straightdope.com/t/reclassify-fund-as-non-diversified/931622/3 "2021-01-27T21:14:10Z")

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A diversified investment company is defined by 15 U.S.C. 80a-5(b), and it generally means that it has to invest in mix of investments rather than being concentrated in a single stock or other security. Specifically, at least 75% of its assets have to be invested in a combination of:

- cash and cash equivalents,
- government securities,
- securities of other investment companies (e.g., mutual funds), and
- securities of any other issuer as long as that security isn’t greater than 5% of the fund’s value and not more than 10% of the outstanding voting securities of the securities’ issuer.

So, even in a diversified fund, up to 25% of the portfolio can be invested in a single stock, as long as the remainder is invested in a more diversified way. Non-diversified funds can basically invest in a portfolio that is as concentrated as they choose. In an extreme example, a non-diversified fund could invest in just Apple and Amazon if it so chose.

They are telling you it’s non-diversified because that is one sign that the fund might be extra risky. Furthermore, a diversified fund has to get shareholder approval to switch to a non-diversified strategy, which means you will at least know ahead of time if the fund suddenly adopts a riskier concentrated strategy. If you buy a non-diversified fund, the buyer should beware that the fund can make some pretty dramatic portfolio changes without advance notice.

> [@What\_Exit](#):
>
> The fund is still restricted to \<=5% in a single company though.

This is not true even for diversified investment companies and it is super-duper extra wrong for non-diversified companies. The Vanguard S&P 500 fund is diversified in both common parlance and by the legal definition. It currently holds over 6% of its assets in Apple.

> **[VOO – Portfolio – Vanguard S&P 500 ETF | Morningstar](https://www.morningstar.com/etfs/arcx/voo/portfolio)**
>
> VOO Portfolio - Learn more about the Vanguard S&P 500 ETF investment portfolio including asset allocation, stock style, stock holdings and more.

By contrast, Oakmark Select aims to own no more than 20 stocks, and it’s largest holding is nearly 10% of the fund.

> **[OAKLX – Portfolio – Oakmark Select Investor | Morningstar](https://www.morningstar.com/funds/xnas/oaklx/portfolio)**
>
> OAKLX Portfolio - Learn more about the Oakmark Select Investor investment portfolio including asset allocation, stock style, stock holdings and more.

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**Author:** ![What\_Exit](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/what_exit/32/10652_2.png) [@What\_Exit](https://boards.straightdope.com/u/What_Exit)\
**Post date:** [January 27, 2021, 9:36pm UTC](https://boards.straightdope.com/t/reclassify-fund-as-non-diversified/931622/4 "2021-01-27T21:36:49Z")

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Thanks for the correction, I must have misunderstood something I learned in the past.

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**Author:** ![PoppaSan](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/poppasan/32/189_2.png) [@PoppaSan](https://boards.straightdope.com/u/PoppaSan)\
**Post date:** [January 30, 2021, 12:42am UTC](https://boards.straightdope.com/t/reclassify-fund-as-non-diversified/931622/5 "2021-01-30T00:42:57Z")

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So if one were an energy fund and another a utility, being non-diversified they can dump the parts that don’t match their core and concentrate on a smaller part of the market. Got it.