Morgan Stanley’s Adam Parker says he needs to do better.
In a note to clients on Tuesday, Parker wrote that his team’s recommended portfolio performance in the first half of this year was its worst in more than 5 years.
Morgan Stanley’s “MOST Strategic Portfolio” was down 1.2% in the first six months of the year against a 4.1% increase for the S&P 500, a 5.3% relative underperformance. Since the portfolio’s inception, MOST is up 90.8% against an 80.7% return for the benchmark index.
To make up for this bad stretch, Parker writes that the team needs — in golf parlance — some birdies.
And to get there, Parker is making some big changes. Among the biggest changes recommended by Parker and his team is reducing exposure to consumer discretionary stocks, adding to what was a significant underweight in consumer staples, and cutting exposure to both financial and healthcare stocks.
But Parker admits to being somewhat reticent to undertake such big changes inside a portfolio as big shifts risk compounding your mistakes if the market again moves against you.
Here’s Parker (emphasis mine):
“Oftentimes when I play golf, I score poorly on the front nine, but the psychological switch to the back nine gives me a new outlook on the round. Sometimes that even results in a materially better score. Given that our portfolio performance in the first half of 2016 has been our worst in more than a half decade, we are hoping for a strong showing here on the back nine of the 2016 calendar year. We need some portfolio birdies, so to speak.
Up to now, we had dealt with our lagging performance by lowering our portfolio turnover (we have made zero changes in Q2). But, we are altering our strategy for the back nine by undertaking a substantial portfolio overhaul in today’s work. We worry about being wrong in both directions when we throw in the towel on some of our unsuccessful sector recommendations, particularly financials and energy, but we want to make less active and extreme sector bets given the sharp sector reversals we’ve experienced over the last two years.”
Parker has long been one of the most honest and interesting strategists on the street, writing often about his mistakes, his frustrations with those who are sure they know better, and his absolute uncertainty about the future.
And so Parker’s frankness here — that a bad six months needs to be counter-acted with a good six, though the offered solution might actually make things worse — is appreciated.
At least from where we sit.
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