Morgan Stanley’s Adam Parker had a tough year thus far. Scratch that, a tough five years. Parker’s portfolio performance in 1H 2016 was “our worst in more than a half decade” and as all good investment managers do, he hopes for a strong 2H. His hope also has been clearly thought out, as Parker framed his hope parallel to that experienced by desperate golfers who shank the front 9 and hope to bank on the back 9. We just hope his bet on financials won’t make him the “bulge bracket…counter-indicating idiot” he fears becoming (we don’t expect him to improve on Dick Bove’s performance), which might be tough considering that his “MOST Strategic Portoflio” has underperformed the S&P by 5.3% YTD:
Although we are certain Mr. Parker puts in his hours in the office, it is clear that analyzing the firms’ portfolio and making appropriate investment alterations (something he said he didn’t do in Q2) took to the back-burner relative to generating new quips about how to excuse poor performance at the end of a Fed induced rally.
Some quotes to think about next time you find yourself on the course with a veteran digging in the weeds:
- “We overstayed our welcome” in consumer discretionary names.
- “We have been too cautious on consumer staples“.
- “We worry about being the strategist at the bulge bracket firm who becomes the counter-indicating idiot with this downgrade” of financials to equal-weight.
Finally, in Adam Parkers own words:
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. It seems clear that rates will remain lower than for much of history and that oil is healing, and our financials-over-energy pair trade, which has damaged the portfolio, seems imprudent at this juncture.
The relatively uncertain macro backdrop makes us want to more religiously stick to the quantamental discipline. Our top-down sector judgments have generated reasonable alpha since portfolio initiation in January of 2011, but have failed year-to-date.
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