What is a concentrated mutual fund? A concentrated mutual fund is one that contains a large holding of a small amount of stocks. Concentrated mutual funds have become far more popular over the past decade. A large reason for the popularity of concentrated funds has been their impressive performances. 
There are different types of concentrated funds. There are concentrated funds that just buy certain sectors and make a huge bet on those specific sectors. There are also concentrated mutual funds who diversify through different sectors, but do so while still only having a total of 20 to 30 stocks in their portfolio. The latter is the type of concentrated fund I believe you should consider investing in. A mutual fund who simply bets on one sector and doesn't diversify is not the type of fund you should look for.
A concentrated fund of 20 to 30 holdings has some decided advantages over its peers who have a larger amount of holdings. By holding just 20 to 30 stocks the manager knows each company like the back of their hand. Stock selection is put at an absolute premium in these types of funds, and the manager's best ideas are overweighted far more. In reality, when a manager has 200 stocks in their portfolio, the largest holding usually has little weighting on the overall fund. It is very logical to simply put fewer stocks in the portfolio, stocks that the manager feels very passionately about. In fact, University of Michigan professors found concentrated mutual funds to be better performers.
Several concentrated mutual funds have performed very well over the past several years. The Fairholme Fund (FAIRX), run by Bruce Berkowitz, has been a top performer over the past few years. Bill Nygren, manager of the popular Oakmark Select Fund (OAKLX), was one of the leaders in the concentrated mutual fund movement, and his fund has done well picking a concentrated lineup of value stocks. CGM Focus (CGMFX) is a concentrated mutual fund run by Kenneth Heebner which is actually the top ranked mutual fund in the large cap blend segment over both a 3 and 5 year period.
The success of concentrated, but diversified mutual funds makes sense to me. The manager picks stocks that they are most passionate about, and their fund is more leveraged to the returns from those stocks. While concentrated funds shouldn't make up your entire portfolio, adding one or two concentrated funds where the manager's track record is proven may well help your portfolio's performance.
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