Reuters Money

When people talk about house values, they say that three words matter the most, “Location, location, location.”

When Maura A. Shaughnessy, manager of MFS Utilities Fund since its inception 19 years ago, thinks about what to invest in, there are also three words that matter the most, “Diversification, diversification, diversification.”

If anything is important about mutual funds — any mutual fund — it is diversification. Yet nowhere is diversification to minimize investment risk more important to investors than in sector funds –- funds that are concentrated in slices of the U.S. or world economies, such as a utilities fund or a technology fund.

Diversification of a sector fund is also important to the people who run one, if they want to achieve records of consistently superior risk-adjusted performance for which Shaughnessy’s fund has received its third Lipper award for the latest three years.

For sure, her fund didn’t receive the awards for just collecting dividends from corporations that generate and sell electricity for lights and power in the U.S.  She gets accolades for broadening the definition of utilities beyond that of her benchmark, the Standard & Poor’s 500 Utilities Index, to include new industries and foreign markets (such as Brazil). Shaughnessy has also broadened her scope to include bonds and convertible securities in addition to common stocks, when they promise greater appreciation, higher income — and diversification of a different kind.

“The fund’s exposure to the telephone services industry, which is not represented in the S&P Utilities Index, was the principal driver of performance relative to the benchmark,” she wrote in the annual report for the October 31 fiscal year along with Robert Persons, co-manager, who has run the fund’s fixed income portfolio since 2005. Other industries they cited for helping results: cable TV, energy, and gas pipelines.

As a member of the team supporting T. Rowe Price Global Technology Fund since 2003 and as its portfolio manager since 2008, David J. Eiswert has a ready explanation of why the fund has repeated as winner of a Lipper Fund Award for performance for the last five years in the global science and technology category:

“The fund’s performance has been driven as much by what we have owned as by what we have not owned,” he says. “We avoided a significant overweight in the (personal computer) and large cap (information technology) segment and instead were overweight the emerging mobile computing space.” Eiswert’s team focuses on what he calls “the most compelling positive trends.” In addition, they look for companies that are taking market share from competitors and benefit from disruption in technology markets.

Guiding principles for the fund include managing risk with position size. “When we bet big, we have a deep understanding of the company,” he says. Eiswert also aims to have more than 30 percent of the portfolio invested outside the U.S., supported by research offices in Japan, UK, Singapore, and Hong Kong.

The T. Rowe Price Health Sciences Fund, another repeat Lipper Fund Award winner for the last five years in the health and biotechnology sector, has stuck with the policy employed by Kris H. Jenner, its longtime portfolio manager – large allocations to the biotechnical and pharmaceutical sectors.

Jenner looks to biotechs, which tend to be small-caps (under $2 billion), for successful introduction of important medicines that can have a large impact on revenues and earnings. And he likes big pharma firms for their much larger revenue and income streams — as well as for the introduction of new successful drugs, which most likely will have relatively less impact on the bottom lines. Combined, the two subsectors accounted for just over 50 percent of the fund at the end of 2010.

“We have a strong interest in innovation, where possible in the context of smaller companies to provide shareholders more leverage,” Jenner says.

When it comes to retail investing, does anything say diversification more than Amazon.com? It recently claimed the No. 2 position in the Fidelity Select Retailing Portfolio, a repeat winner of the Lipper Fund Award for the last three years in the consumer services category.

Characterized as “high quality…steady” by portfolio manager Peter Dixon, Amazon.com was sandwiched between do-it-yourself merchandise providers, Home Depot and Lowe’s Companies. Macy’s, a traditional department store company, ranked tenth.

Dixon, who became manager nearly a year ago, is running a fairly concentrated portfolio. In the most recent (January 31) report, the top three of about 55 holdings accounted for 33 percent. The next seven stocks brought the top 10’s total to 61.8 percent.