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At the Money: Building A Concentrated Portfolio · Masters in Business

• 0:00
  Speaker 1: That's small to see. If we don't want to go,
• 0:11
  Speaker 1: oh my god, this.
• 0:13
  Speaker 2: Is how many stocks do you need to own to
• 0:16
  Speaker 2: really be diversified? The number is probably a lot lower
• 0:21
  Speaker 2: than you think. Concentrated portfolios are the opposite of broad
• 0:26
  Speaker 2: market indexes or funds and ETFs. They only own a
• 0:30
  Speaker 2: handful of stocks, typically twenty to thirty names. The goal
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  Speaker 2: is to own the best performers without all of the
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  Speaker 2: dead weight. I'm Barry Ritolts, and on today's edition of
• 0:42
  Speaker 2: At the Money, we're gonna discuss whether or not you
• 0:45
  Speaker 2: should own a concentrated portfolio. To help us unpack all
• 0:49
  Speaker 2: of this and what it means for your holdings, let's
• 0:52
  Speaker 2: bring in Andrew Slimmon. He's the managing director at Morgan
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  Speaker 2: Stanley Investment Management, where he leads the Applied Equity Advisors
• 1:00
  Speaker 2: team and serves as senior portfolio manager for all of
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  Speaker 2: Morgan Stanley's long equity strategies. His team manages about eight
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  Speaker 2: billion dollars in client assets. Slimmon's portfolios have done well
• 1:13
  Speaker 2: against the indexes, and his global portfolio has trounched the benchmarks.
• 1:19
  Speaker 2: Let's start with the basics. What exactly is a concentrated portfolio.
• 1:24
  Speaker 1: As I think about, a concentrated portfolio means two things.
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  Speaker 1: As you said, it can be a limited number of positions,
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  Speaker 1: so you know, ten to twenty stocks can be concentrated,
• 1:35
  Speaker 1: or it can mean a limited number of what I
• 1:39
  Speaker 1: would call directional positions. So if you think about the
• 1:43
  Speaker 1: S and P five hundred has lots of different sectors,
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  Speaker 1: you could have a lot of stocks, but say you
• 1:50
  Speaker 1: put them all in one or two sectors, you would
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  Speaker 1: you would have a concentrated portfolio simply because it had
• 1:58
  Speaker 1: made a directional positioning versus a more diversified situation.
• 2:05
  Speaker 2: So what are the advantages of having just a few
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  Speaker 2: stocks or just a few sectors. How does that generate
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  Speaker 2: better returns than the market.
• 2:13
  Speaker 1: If you have a limited number of stocks, you're trying
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  Speaker 1: to find the best the best stocks in that group
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  Speaker 1: and eliminate the dogs. I think that there is a
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  Speaker 1: benefit to that, But what's important is to make sure
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  Speaker 1: that your positions are diverse fied. So what's perverse about
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  Speaker 1: this is I could have ten stocks and be more
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  Speaker 1: diversified than if I own one hundred socks, because as
• 2:44
  Speaker 1: long as those ten stocks don't zig and zag the
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  Speaker 1: other they might be in different sectors. They might be
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  Speaker 1: different you know, some might be growth or value or defensive.
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  Speaker 1: I might be more diversified owning ten stocks than if
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  Speaker 1: I owned lots and lots of stocks that you know,
• 3:03
  Speaker 1: that are highly correlated. So I think it's a combination
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  Speaker 1: of the number of positions. But whether you're diversify, which
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  Speaker 1: I'm fully in favor of, really depends on what is
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  Speaker 1: the correlation the relationships of the stocks and the portfolios.
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  Speaker 2: So there's no magic number where at x number of
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  Speaker 2: shares you're really diversified. It depends on the companies themselves,
• 3:27
  Speaker 2: the sectors are in, what various factors and qualities they have.
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  Speaker 2: Is that a fair way to describe that.
• 3:32
  Speaker 1: That's that's exactly right, That's exactly right. I mean, here,
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  Speaker 1: here's a great example. We own in our fund in Nvidio,
• 3:40
  Speaker 1: but we also own Massacard and you'd say, oh wow,
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  Speaker 1: in videos you know a tech company, it's a semiconductor company,
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  Speaker 1: h and Massacard is a finance transactional company. So boy,
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  Speaker 1: they that's those stocks don't jig and zag the other
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  Speaker 1: they're they're not correlated. Well, actually they are because they're
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  Speaker 1: both large cap growth stocks, And at the end of
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  Speaker 1: the day, as we've discussed in the past, very stocks
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  Speaker 1: move with their with their factor. Right, those are both
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  Speaker 1: growth stocks. So with growth stocks work, those will work together,
• 4:21
  Speaker 1: and growth stocks don't work, they won't work together. So
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  Speaker 1: understanding the correlations is more than just well what sect
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  Speaker 1: do they they fall into?
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  Speaker 2: So previously we've discussed active share. What does that mean
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  Speaker 2: in the world of concentrated portfolios? How much active share
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  Speaker 2: do you need to make a concentrated set of holdings
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  Speaker 2: look different than the index?
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  Speaker 1: Well, you know this. Studies show that you need to
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  Speaker 1: have active share of somewhere between eighty and ninety percent,
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  Speaker 1: which means ninety percent of your of your portfolio differs
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  Speaker 1: from the the index. Now, I'm a believer in owning
• 5:04
  Speaker 1: stocks that are in your benchmark, but just not owning
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  Speaker 1: many of them. You could have high active share again
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  Speaker 1: by owning stocks that are not in the index. But
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  Speaker 1: over time, the higher your active share, the better managers
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  Speaker 1: do because if you only own say twenty stocks, it's
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  Speaker 1: going to become pretty apparent whether you're good or not
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  Speaker 1: because you're not kind of moving on a daily basis
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  Speaker 1: with the index. And so there is survivor, as I
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  Speaker 1: call survivorship bias. But higher active shares proven to outperform
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  Speaker 1: lower act to share over time.
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  Speaker 2: So I know you're a fan of various market factors
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  Speaker 2: like value, quality, and momentum. How does that fit into
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  Speaker 2: the equationion of a concentrated portfolio?
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  Speaker 1: Just academically, we know that any stock, and I'll go
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  Speaker 1: back to Nvidia, it is a large cap technology growth stock,
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  Speaker 1: and over time or Apple, same thing. Large cap growth
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  Speaker 1: technology stock, about two thirds of its return in any
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  Speaker 1: one year can be defined by those what I call
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  Speaker 1: factor exposures. Only a third comes from what's going on
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  Speaker 1: at the company level. So, in other words, as a
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  Speaker 1: portfolio manager, I need to make sure that I understand
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  Speaker 1: what is going to work in the future. Are we
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  Speaker 1: an environment where growth stocks are going to work? Are
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  Speaker 1: we environment work value stocks are going to work. Value
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  Speaker 1: has a little bit more inflation sensitivity, and so value
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  Speaker 1: stocks have worked recently. So I think understanding those large
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  Speaker 1: factors has to play into it. I can't just put
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  Speaker 1: my blinders on and say I'm just going to buy
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  Speaker 1: twenty stocks that you know I love fundamentally and I'm
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  Speaker 1: not going to look at anything else. I've seen so
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  Speaker 1: many managers that have made that mistake is they don't
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  Speaker 1: focus on the bigger factors as well, and so we
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  Speaker 1: play into that. And that's why I go back to
• 7:27
  Speaker 1: that Invidia versus master Card example, which is on the
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  Speaker 1: surface two different sectors, but they are both growth stocks
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  Speaker 1: and therefore they will move with the growth factor. So
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  Speaker 1: if I have twenty stocks and I don't want to
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  Speaker 1: have just exposure to the growth factor, I better go
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  Speaker 1: find another finance stock that's not correlated to the growth factor.
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  Speaker 1: Say you know a bank or whatever.
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  Speaker 2: Given your concentrated portfolios twenty internationally thirty domestically, how much
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  Speaker 2: more risk is contained in that small number of stocks
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  Speaker 2: versus your benchmarks that in some cases are five hundred
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  Speaker 2: or sixteen hundred different names.
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  Speaker 1: That is true, but there are very very large stocks
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  Speaker 1: in the index today. And if you you know, in
• 8:18
  Speaker 1: our global concentrate, we don't own app well, Apple had
• 8:22
  Speaker 1: a very tough, good, tough first quarter, so that added
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  Speaker 1: a lot of relative performance to our portfolio because it's
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  Speaker 1: a big waiting in the index. So I just I
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  Speaker 1: think it's understanding what is the makeup of the index
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  Speaker 1: and identifying stocks you think will work and ones in
• 8:46
  Speaker 1: being underweight, the ones that won't work.
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  Speaker 2: And what about different regions? Can you run a concentrated
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  Speaker 2: portfolio with a global tilt very separate from the US.
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  Speaker 1: If I said to you, Barry, I want to run
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  Speaker 1: a portfolio for you, and I want to just be
• 9:02
  Speaker 1: able to buy the best companies I can find that
• 9:06
  Speaker 1: I think I can make the most money for you,
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  Speaker 1: and I don't care where they come from, just the
• 9:13
  Speaker 1: best opportunities. Would you say yes to that more than Barry?
• 9:17
  Speaker 1: I just I want to buy only European stocks for you,
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  Speaker 1: or only you know, emerging markets, or only this region
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  Speaker 1: or only this style. What would you jump at? And
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  Speaker 1: I just always remember I was out of conferences about
• 9:32
  Speaker 1: ten years ago and in London and this international manager
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  Speaker 1: says to me, so, Andrew, you run a global concert.
• 9:39
  Speaker 1: There was global fun. How you know what European banks
• 9:42
  Speaker 1: do you invest in? And I said, I don't have
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  Speaker 1: a single European banks. Wow, you can't do that. It's
• 9:49
  Speaker 1: in my European benchmark. I don't like European banks either,
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  Speaker 1: but I got to own them. And it was really
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  Speaker 1: at that point I thought, you know, this is crazy.
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  Speaker 1: Let's just let's just find the best ideas we can,
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  Speaker 1: you know, around the world and just have a limited
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  Speaker 1: number of them. I just think that that's, you know,
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  Speaker 1: it's a better approach than presuming that you can allocate
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  Speaker 1: to these specifics, regions or styles, because managers then they're
• 10:19
  Speaker 1: going to buy things that they may not want to
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  Speaker 1: own because they're in the index.
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  Speaker 2: You are one of the few active managers I am
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  Speaker 2: familiar with who seem to also embrace passive indexing. Tell
• 10:33
  Speaker 2: us a little bit about how a concentrated portfolio matches
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  Speaker 2: up with a broad index.
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  Speaker 1: Look, Barry, I've got no problem with people getting market exposure,
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  Speaker 1: but there is a place for active management, and I'm
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  Speaker 1: a believer in finding great companies and making sure they're
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  Speaker 1: all they're not, you know, they're not highly correlated, and
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  Speaker 1: it's sticking with them. When I'm absolutely not a fan
• 11:01
  Speaker 1: of is low act to share mutual funds that own
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  Speaker 1: lots and lots of positions. And the number of times
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  Speaker 1: I read Oracles Berry where someone says, oh, I love
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  Speaker 1: this stock, it's my favorite position, and then you know,
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  Speaker 1: you look up and they have a one and a
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  Speaker 1: half or two percent positions. Well, you know that's ridiculous
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  Speaker 1: because even the stock doubles. You know, they're not they're
• 11:24
  Speaker 1: not really they don't really believe in those companies if
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  Speaker 1: they own you know, uh, small positions. So you know,
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  Speaker 1: my the my enemy is not passive strategies. My enemy
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  Speaker 1: is really, uh, it's the closet, the closet indexers, because
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  Speaker 1: I think they're bringing a bad name to you know,
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  Speaker 1: to active managers. So I I I embrace, uh, passive strategies.
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  Speaker 1: I have. You know, I have passive strategies in my
• 11:52
  Speaker 1: personal portfolio, but I have active managers that I know
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  Speaker 1: have done very well over time, and I've stuck with them,
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  Speaker 1: and you know it's work. So there's a place for both.
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  Speaker 1: It's just the closet indexers. There's no place for.
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  Speaker 2: So to wrap up. If you're going to go active, well,
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  Speaker 2: then go active. Own a percentage of your portfolio in
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  Speaker 2: a concentrated set of holdings with an active manager with
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  Speaker 2: a high active share that marries up well to an
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  Speaker 2: inexpensive passive index, and it improves the odds of outperforming
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  Speaker 2: the broad indices. It can add a little sizzle to
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  Speaker 2: a conservative set of market holdings. I'm Barry Ridolts, and
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  Speaker 2: this has been Bloomberg's at the Mire.
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  Speaker 1: This small