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