1 00:00:00,880 --> 00:00:11,559 Speaker 1: That's small to see. If we don't want to go, 2 00:00:11,800 --> 00:00:13,119 Speaker 1: oh my god, this. 3 00:00:13,360 --> 00:00:16,560 Speaker 2: Is how many stocks do you need to own to 4 00:00:16,760 --> 00:00:21,439 Speaker 2: really be diversified? The number is probably a lot lower 5 00:00:21,440 --> 00:00:26,520 Speaker 2: than you think. Concentrated portfolios are the opposite of broad 6 00:00:26,600 --> 00:00:30,520 Speaker 2: market indexes or funds and ETFs. They only own a 7 00:00:30,600 --> 00:00:34,960 Speaker 2: handful of stocks, typically twenty to thirty names. The goal 8 00:00:35,120 --> 00:00:38,640 Speaker 2: is to own the best performers without all of the 9 00:00:38,680 --> 00:00:42,120 Speaker 2: dead weight. I'm Barry Ritolts, and on today's edition of 10 00:00:42,200 --> 00:00:44,960 Speaker 2: At the Money, we're gonna discuss whether or not you 11 00:00:45,040 --> 00:00:49,440 Speaker 2: should own a concentrated portfolio. To help us unpack all 12 00:00:49,479 --> 00:00:52,200 Speaker 2: of this and what it means for your holdings, let's 13 00:00:52,200 --> 00:00:55,400 Speaker 2: bring in Andrew Slimmon. He's the managing director at Morgan 14 00:00:55,480 --> 00:00:59,920 Speaker 2: Stanley Investment Management, where he leads the Applied Equity Advisors 15 00:01:00,040 --> 00:01:03,800 Speaker 2: team and serves as senior portfolio manager for all of 16 00:01:03,880 --> 00:01:09,039 Speaker 2: Morgan Stanley's long equity strategies. His team manages about eight 17 00:01:09,120 --> 00:01:13,679 Speaker 2: billion dollars in client assets. Slimmon's portfolios have done well 18 00:01:13,720 --> 00:01:18,760 Speaker 2: against the indexes, and his global portfolio has trounched the benchmarks. 19 00:01:19,120 --> 00:01:23,800 Speaker 2: Let's start with the basics. What exactly is a concentrated portfolio. 20 00:01:24,360 --> 00:01:26,759 Speaker 1: As I think about, a concentrated portfolio means two things. 21 00:01:26,920 --> 00:01:30,920 Speaker 1: As you said, it can be a limited number of positions, 22 00:01:31,400 --> 00:01:34,399 Speaker 1: so you know, ten to twenty stocks can be concentrated, 23 00:01:35,040 --> 00:01:39,800 Speaker 1: or it can mean a limited number of what I 24 00:01:39,840 --> 00:01:43,640 Speaker 1: would call directional positions. So if you think about the 25 00:01:43,760 --> 00:01:46,960 Speaker 1: S and P five hundred has lots of different sectors, 26 00:01:47,319 --> 00:01:50,080 Speaker 1: you could have a lot of stocks, but say you 27 00:01:50,240 --> 00:01:54,000 Speaker 1: put them all in one or two sectors, you would 28 00:01:54,360 --> 00:01:58,680 Speaker 1: you would have a concentrated portfolio simply because it had 29 00:01:58,840 --> 00:02:05,040 Speaker 1: made a directional positioning versus a more diversified situation. 30 00:02:05,520 --> 00:02:07,880 Speaker 2: So what are the advantages of having just a few 31 00:02:07,960 --> 00:02:11,480 Speaker 2: stocks or just a few sectors. How does that generate 32 00:02:11,600 --> 00:02:13,200 Speaker 2: better returns than the market. 33 00:02:13,880 --> 00:02:16,359 Speaker 1: If you have a limited number of stocks, you're trying 34 00:02:16,360 --> 00:02:20,480 Speaker 1: to find the best the best stocks in that group 35 00:02:20,600 --> 00:02:24,480 Speaker 1: and eliminate the dogs. I think that there is a 36 00:02:24,560 --> 00:02:28,600 Speaker 1: benefit to that, But what's important is to make sure 37 00:02:28,840 --> 00:02:34,480 Speaker 1: that your positions are diverse fied. So what's perverse about 38 00:02:34,480 --> 00:02:38,880 Speaker 1: this is I could have ten stocks and be more 39 00:02:39,000 --> 00:02:44,239 Speaker 1: diversified than if I own one hundred socks, because as 40 00:02:44,360 --> 00:02:47,000 Speaker 1: long as those ten stocks don't zig and zag the 41 00:02:47,040 --> 00:02:51,600 Speaker 1: other they might be in different sectors. They might be 42 00:02:51,720 --> 00:02:55,600 Speaker 1: different you know, some might be growth or value or defensive. 43 00:02:56,400 --> 00:02:59,320 Speaker 1: I might be more diversified owning ten stocks than if 44 00:02:59,360 --> 00:03:02,600 Speaker 1: I owned lots and lots of stocks that you know, 45 00:03:03,080 --> 00:03:06,680 Speaker 1: that are highly correlated. So I think it's a combination 46 00:03:06,960 --> 00:03:10,639 Speaker 1: of the number of positions. But whether you're diversify, which 47 00:03:10,639 --> 00:03:14,080 Speaker 1: I'm fully in favor of, really depends on what is 48 00:03:14,120 --> 00:03:18,040 Speaker 1: the correlation the relationships of the stocks and the portfolios. 49 00:03:18,120 --> 00:03:21,640 Speaker 2: So there's no magic number where at x number of 50 00:03:21,720 --> 00:03:27,000 Speaker 2: shares you're really diversified. It depends on the companies themselves, 51 00:03:27,040 --> 00:03:30,959 Speaker 2: the sectors are in, what various factors and qualities they have. 52 00:03:31,080 --> 00:03:32,680 Speaker 2: Is that a fair way to describe that. 53 00:03:32,680 --> 00:03:36,200 Speaker 1: That's that's exactly right, That's exactly right. I mean, here, 54 00:03:36,240 --> 00:03:39,880 Speaker 1: here's a great example. We own in our fund in Nvidio, 55 00:03:40,320 --> 00:03:43,680 Speaker 1: but we also own Massacard and you'd say, oh wow, 56 00:03:44,160 --> 00:03:47,600 Speaker 1: in videos you know a tech company, it's a semiconductor company, 57 00:03:48,480 --> 00:03:54,960 Speaker 1: h and Massacard is a finance transactional company. So boy, 58 00:03:55,080 --> 00:03:58,000 Speaker 1: they that's those stocks don't jig and zag the other 59 00:03:58,040 --> 00:04:02,840 Speaker 1: they're they're not correlated. Well, actually they are because they're 60 00:04:02,920 --> 00:04:08,040 Speaker 1: both large cap growth stocks, And at the end of 61 00:04:08,040 --> 00:04:11,760 Speaker 1: the day, as we've discussed in the past, very stocks 62 00:04:11,960 --> 00:04:16,680 Speaker 1: move with their with their factor. Right, those are both 63 00:04:16,880 --> 00:04:21,159 Speaker 1: growth stocks. So with growth stocks work, those will work together, 64 00:04:21,200 --> 00:04:24,000 Speaker 1: and growth stocks don't work, they won't work together. So 65 00:04:24,640 --> 00:04:29,760 Speaker 1: understanding the correlations is more than just well what sect 66 00:04:29,760 --> 00:04:31,600 Speaker 1: do they they fall into? 67 00:04:32,040 --> 00:04:36,400 Speaker 2: So previously we've discussed active share. What does that mean 68 00:04:36,560 --> 00:04:41,039 Speaker 2: in the world of concentrated portfolios? How much active share 69 00:04:41,080 --> 00:04:44,120 Speaker 2: do you need to make a concentrated set of holdings 70 00:04:44,240 --> 00:04:46,240 Speaker 2: look different than the index? 71 00:04:46,720 --> 00:04:49,800 Speaker 1: Well, you know this. Studies show that you need to 72 00:04:49,839 --> 00:04:53,440 Speaker 1: have active share of somewhere between eighty and ninety percent, 73 00:04:53,520 --> 00:04:58,880 Speaker 1: which means ninety percent of your of your portfolio differs 74 00:04:59,080 --> 00:05:03,920 Speaker 1: from the the index. Now, I'm a believer in owning 75 00:05:04,240 --> 00:05:09,360 Speaker 1: stocks that are in your benchmark, but just not owning 76 00:05:09,680 --> 00:05:13,159 Speaker 1: many of them. You could have high active share again 77 00:05:13,279 --> 00:05:17,120 Speaker 1: by owning stocks that are not in the index. But 78 00:05:17,440 --> 00:05:23,640 Speaker 1: over time, the higher your active share, the better managers 79 00:05:23,960 --> 00:05:30,120 Speaker 1: do because if you only own say twenty stocks, it's 80 00:05:30,200 --> 00:05:34,400 Speaker 1: going to become pretty apparent whether you're good or not 81 00:05:34,920 --> 00:05:38,159 Speaker 1: because you're not kind of moving on a daily basis 82 00:05:38,279 --> 00:05:42,680 Speaker 1: with the index. And so there is survivor, as I 83 00:05:42,760 --> 00:05:48,760 Speaker 1: call survivorship bias. But higher active shares proven to outperform 84 00:05:48,839 --> 00:05:50,279 Speaker 1: lower act to share over time. 85 00:05:51,040 --> 00:05:55,000 Speaker 2: So I know you're a fan of various market factors 86 00:05:55,200 --> 00:05:59,359 Speaker 2: like value, quality, and momentum. How does that fit into 87 00:05:59,360 --> 00:06:02,440 Speaker 2: the equationion of a concentrated portfolio? 88 00:06:03,000 --> 00:06:07,000 Speaker 1: Just academically, we know that any stock, and I'll go 89 00:06:07,120 --> 00:06:15,080 Speaker 1: back to Nvidia, it is a large cap technology growth stock, 90 00:06:15,440 --> 00:06:19,599 Speaker 1: and over time or Apple, same thing. Large cap growth 91 00:06:19,640 --> 00:06:25,599 Speaker 1: technology stock, about two thirds of its return in any 92 00:06:25,600 --> 00:06:29,400 Speaker 1: one year can be defined by those what I call 93 00:06:29,960 --> 00:06:35,120 Speaker 1: factor exposures. Only a third comes from what's going on 94 00:06:35,279 --> 00:06:40,320 Speaker 1: at the company level. So, in other words, as a 95 00:06:40,360 --> 00:06:45,000 Speaker 1: portfolio manager, I need to make sure that I understand 96 00:06:45,080 --> 00:06:47,800 Speaker 1: what is going to work in the future. Are we 97 00:06:47,839 --> 00:06:50,520 Speaker 1: an environment where growth stocks are going to work? Are 98 00:06:50,560 --> 00:06:54,520 Speaker 1: we environment work value stocks are going to work. Value 99 00:06:55,720 --> 00:06:59,040 Speaker 1: has a little bit more inflation sensitivity, and so value 100 00:06:59,240 --> 00:07:04,640 Speaker 1: stocks have worked recently. So I think understanding those large 101 00:07:04,720 --> 00:07:08,039 Speaker 1: factors has to play into it. I can't just put 102 00:07:08,080 --> 00:07:10,920 Speaker 1: my blinders on and say I'm just going to buy 103 00:07:11,320 --> 00:07:16,560 Speaker 1: twenty stocks that you know I love fundamentally and I'm 104 00:07:16,600 --> 00:07:18,600 Speaker 1: not going to look at anything else. I've seen so 105 00:07:18,640 --> 00:07:21,720 Speaker 1: many managers that have made that mistake is they don't 106 00:07:22,120 --> 00:07:25,600 Speaker 1: focus on the bigger factors as well, and so we 107 00:07:25,760 --> 00:07:27,840 Speaker 1: play into that. And that's why I go back to 108 00:07:27,880 --> 00:07:32,440 Speaker 1: that Invidia versus master Card example, which is on the 109 00:07:32,520 --> 00:07:37,520 Speaker 1: surface two different sectors, but they are both growth stocks 110 00:07:37,560 --> 00:07:41,120 Speaker 1: and therefore they will move with the growth factor. So 111 00:07:41,320 --> 00:07:43,680 Speaker 1: if I have twenty stocks and I don't want to 112 00:07:43,680 --> 00:07:46,720 Speaker 1: have just exposure to the growth factor, I better go 113 00:07:46,760 --> 00:07:51,160 Speaker 1: find another finance stock that's not correlated to the growth factor. 114 00:07:51,280 --> 00:07:52,840 Speaker 1: Say you know a bank or whatever. 115 00:07:53,360 --> 00:07:59,480 Speaker 2: Given your concentrated portfolios twenty internationally thirty domestically, how much 116 00:07:59,520 --> 00:08:03,160 Speaker 2: more risk is contained in that small number of stocks 117 00:08:03,800 --> 00:08:06,960 Speaker 2: versus your benchmarks that in some cases are five hundred 118 00:08:07,440 --> 00:08:09,400 Speaker 2: or sixteen hundred different names. 119 00:08:09,760 --> 00:08:15,440 Speaker 1: That is true, but there are very very large stocks 120 00:08:15,440 --> 00:08:18,720 Speaker 1: in the index today. And if you you know, in 121 00:08:18,920 --> 00:08:22,320 Speaker 1: our global concentrate, we don't own app well, Apple had 122 00:08:22,440 --> 00:08:28,080 Speaker 1: a very tough, good, tough first quarter, so that added 123 00:08:28,120 --> 00:08:33,240 Speaker 1: a lot of relative performance to our portfolio because it's 124 00:08:33,360 --> 00:08:36,800 Speaker 1: a big waiting in the index. So I just I 125 00:08:36,840 --> 00:08:41,040 Speaker 1: think it's understanding what is the makeup of the index 126 00:08:42,200 --> 00:08:46,240 Speaker 1: and identifying stocks you think will work and ones in 127 00:08:46,280 --> 00:08:48,360 Speaker 1: being underweight, the ones that won't work. 128 00:08:48,679 --> 00:08:51,840 Speaker 2: And what about different regions? Can you run a concentrated 129 00:08:51,880 --> 00:08:56,640 Speaker 2: portfolio with a global tilt very separate from the US. 130 00:08:56,960 --> 00:08:59,000 Speaker 1: If I said to you, Barry, I want to run 131 00:08:59,040 --> 00:09:02,480 Speaker 1: a portfolio for you, and I want to just be 132 00:09:02,559 --> 00:09:06,440 Speaker 1: able to buy the best companies I can find that 133 00:09:06,520 --> 00:09:08,360 Speaker 1: I think I can make the most money for you, 134 00:09:09,000 --> 00:09:13,360 Speaker 1: and I don't care where they come from, just the 135 00:09:13,400 --> 00:09:17,360 Speaker 1: best opportunities. Would you say yes to that more than Barry? 136 00:09:17,480 --> 00:09:20,640 Speaker 1: I just I want to buy only European stocks for you, 137 00:09:21,080 --> 00:09:25,079 Speaker 1: or only you know, emerging markets, or only this region 138 00:09:25,240 --> 00:09:28,920 Speaker 1: or only this style. What would you jump at? And 139 00:09:29,440 --> 00:09:32,000 Speaker 1: I just always remember I was out of conferences about 140 00:09:32,120 --> 00:09:36,480 Speaker 1: ten years ago and in London and this international manager 141 00:09:36,559 --> 00:09:39,200 Speaker 1: says to me, so, Andrew, you run a global concert. 142 00:09:39,320 --> 00:09:42,640 Speaker 1: There was global fun. How you know what European banks 143 00:09:42,640 --> 00:09:45,480 Speaker 1: do you invest in? And I said, I don't have 144 00:09:45,640 --> 00:09:49,719 Speaker 1: a single European banks. Wow, you can't do that. It's 145 00:09:49,760 --> 00:09:53,040 Speaker 1: in my European benchmark. I don't like European banks either, 146 00:09:53,080 --> 00:09:55,360 Speaker 1: but I got to own them. And it was really 147 00:09:55,400 --> 00:09:57,520 Speaker 1: at that point I thought, you know, this is crazy. 148 00:09:58,160 --> 00:10:01,280 Speaker 1: Let's just let's just find the best ideas we can, 149 00:10:01,760 --> 00:10:05,680 Speaker 1: you know, around the world and just have a limited 150 00:10:05,760 --> 00:10:08,480 Speaker 1: number of them. I just think that that's, you know, 151 00:10:09,160 --> 00:10:14,280 Speaker 1: it's a better approach than presuming that you can allocate 152 00:10:14,320 --> 00:10:19,280 Speaker 1: to these specifics, regions or styles, because managers then they're 153 00:10:19,280 --> 00:10:21,760 Speaker 1: going to buy things that they may not want to 154 00:10:21,800 --> 00:10:24,400 Speaker 1: own because they're in the index. 155 00:10:25,320 --> 00:10:28,080 Speaker 2: You are one of the few active managers I am 156 00:10:28,120 --> 00:10:33,360 Speaker 2: familiar with who seem to also embrace passive indexing. Tell 157 00:10:33,440 --> 00:10:38,000 Speaker 2: us a little bit about how a concentrated portfolio matches 158 00:10:38,120 --> 00:10:39,520 Speaker 2: up with a broad index. 159 00:10:40,280 --> 00:10:45,319 Speaker 1: Look, Barry, I've got no problem with people getting market exposure, 160 00:10:45,760 --> 00:10:50,720 Speaker 1: but there is a place for active management, and I'm 161 00:10:50,760 --> 00:10:55,360 Speaker 1: a believer in finding great companies and making sure they're 162 00:10:55,400 --> 00:10:58,640 Speaker 1: all they're not, you know, they're not highly correlated, and 163 00:10:58,640 --> 00:11:01,520 Speaker 1: it's sticking with them. When I'm absolutely not a fan 164 00:11:01,600 --> 00:11:06,360 Speaker 1: of is low act to share mutual funds that own 165 00:11:06,679 --> 00:11:08,720 Speaker 1: lots and lots of positions. And the number of times 166 00:11:08,760 --> 00:11:10,960 Speaker 1: I read Oracles Berry where someone says, oh, I love 167 00:11:11,080 --> 00:11:14,840 Speaker 1: this stock, it's my favorite position, and then you know, 168 00:11:15,040 --> 00:11:17,040 Speaker 1: you look up and they have a one and a 169 00:11:17,120 --> 00:11:20,640 Speaker 1: half or two percent positions. Well, you know that's ridiculous 170 00:11:20,840 --> 00:11:24,840 Speaker 1: because even the stock doubles. You know, they're not they're 171 00:11:24,880 --> 00:11:28,400 Speaker 1: not really they don't really believe in those companies if 172 00:11:28,440 --> 00:11:33,800 Speaker 1: they own you know, uh, small positions. So you know, 173 00:11:33,920 --> 00:11:37,720 Speaker 1: my the my enemy is not passive strategies. My enemy 174 00:11:37,800 --> 00:11:41,800 Speaker 1: is really, uh, it's the closet, the closet indexers, because 175 00:11:41,840 --> 00:11:44,480 Speaker 1: I think they're bringing a bad name to you know, 176 00:11:44,600 --> 00:11:50,079 Speaker 1: to active managers. So I I I embrace, uh, passive strategies. 177 00:11:50,160 --> 00:11:52,560 Speaker 1: I have. You know, I have passive strategies in my 178 00:11:52,640 --> 00:11:58,200 Speaker 1: personal portfolio, but I have active managers that I know 179 00:11:58,880 --> 00:12:02,640 Speaker 1: have done very well over time, and I've stuck with them, 180 00:12:02,679 --> 00:12:05,240 Speaker 1: and you know it's work. So there's a place for both. 181 00:12:05,559 --> 00:12:08,040 Speaker 1: It's just the closet indexers. There's no place for. 182 00:12:08,360 --> 00:12:11,320 Speaker 2: So to wrap up. If you're going to go active, well, 183 00:12:11,360 --> 00:12:15,560 Speaker 2: then go active. Own a percentage of your portfolio in 184 00:12:15,640 --> 00:12:20,320 Speaker 2: a concentrated set of holdings with an active manager with 185 00:12:20,440 --> 00:12:24,280 Speaker 2: a high active share that marries up well to an 186 00:12:24,320 --> 00:12:29,600 Speaker 2: inexpensive passive index, and it improves the odds of outperforming 187 00:12:30,000 --> 00:12:33,960 Speaker 2: the broad indices. It can add a little sizzle to 188 00:12:34,040 --> 00:12:38,320 Speaker 2: a conservative set of market holdings. I'm Barry Ridolts, and 189 00:12:38,400 --> 00:12:40,840 Speaker 2: this has been Bloomberg's at the Mire. 190 00:12:41,360 --> 00:12:42,120 Speaker 1: This small