How many stocks is enough for your portfolio? We examined that question a little while back, and now new evidence supports the idea that “enough” might be a lower number than most people think.

The data comes from Morningstar Inc., which was recently asked by The Wall Street Journal to look into the issue of diversification — specifically at how concentrated funds of 40 or fewer holdings fared in terms of performance and volatility compared to other funds.

“Among the findings: As a group, these funds haven’t consistently outperformed or underperformed funds with more diverse holdings,” reports the Journal’s Larry Light. “[And] based on recent performance and an earlier Morningstar study, concentrated funds aren’t more volatile than more diversified funds, on average, and some are surprisingly steady despite their small number of holdings.”

The average equity fund has about 180 holdings, writes Light, and fewer than 300 equity funds out of 4,800 (excluding funds of funds and index funds) have 40 or fewer stocks, according to Morningstar’s data. In 2009, Light says, the smaller funds have outperformed the others by a 27% to 24% margin, through September. Since the March market bottom, the concentrated funds have lagged by 1.4 percentage points, however. Over longer periods, the results are also mixed, with the focus funds slightly ahead over one year and three years, and a bit behind over five and 10 years, Light says.

In terms of volatility, a Morningstar study spanning 1992-2006 found that volatility was “fairly close between the least and the most concentrated funds, as measured by standard deviation,” writes Light. “Although that massive study hasn’t been updated, the average returns of focus funds and more diversified funds over the past three years are close enough to suggest not much has changed.”

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