Millions of investors are learning the hard way what it means to have a concentrated stock portfolio. Phil Scott and Jim Atwood are staking their future on it.
The two wealth advisers left JPMorgan Chase and formed an independent firm last month after the bank said their clients' stock portfolios were too concentrated in shares of some highflying artificial-intelligence stocks.
Some of the advisers' longtime clients had nearly 20% of their holdings, amounting to tens of millions of dollars or more, in a single stock, among them Nvidia, Broadcom and Dell Technologies. Scott and Atwood didn't want to diversify, as the bank had requested.
Now the market is putting them to the test.
AI stocks staged a selloff on Thursday, wiping out a record $2.5 trillion in market value from the Nasdaq composite. Nvidia, Broadcom and Dell ended the day down 9.3%, 10% and 15%, respectively. Investors are worried that the Democratic sweep in the midterm elections will lead to a slowdown in data-center development, gumming up the gears of the rest of the AI ecosystem.
Even those with simple index funds have watched their portfolios become increasingly concentrated in a handful of AI-linked companies that are now selling off. The top 10 names in the S&P 500 index represent roughly 40% of its value, with Nvidia alone accounting for about 7%.
That has teed up the biggest question hanging over the stock market right now: Will the AI trade collapse and take the entire market with it?
Scott and Atwood are sticking to the investment strategy that got their new firm, Latigo Peak Partners, to a combined $18.6 billion in assets. JPMorgan and Scott had been going back and forth on how much concentration is too much for a client in a single stock or sector. In March, the bank said he had until January 2027 to diversify, according to Scott.
The advisers didn't want their clients to have to pay big tax bills on gains for companies they wanted to hold on to.
"Firms like JPMorgan want us to rebalance, but our focus is on performance," said Scott, the architect of the portfolios, which are built around picking promising companies and holding their shares for long periods.
Many are taking the other side of this bet. To protect against a wipeout, advisers have counseled clients to diversify away from big AI names. An entire cottage industry has popped up to cater to this need.
Billions of dollars have flowed into direct indexing and long-short tax-aware strategies, which track the market while generating losses to offset capital-gains taxes that result from rebalancing. Assets under management at SpiderRock Advisors, which uses options to help investors diversify their portfolios in a tax-efficient way, have quadrupled to over $16 billion since BlackRock bought it in May 2024.
Investors tend to underestimate the risks and overestimate the returns of holding a concentrated stock position, according to Brian Smith, head of the Wealth Education Center at Morgan Stanley Investment Management. A concentrated position is typically four times more volatile than a diversified benchmark, he said.
Meanwhile, the stocks that power the market for a stretch won't necessarily continue to be winners. Shares of Nvidia have climbed 510% over the past five years, compared with a roughly 57% gain for the S&P 500. But the chip maker has underperformed the benchmark by 15 percentage points over the past 12 months.
"Concentration is the elephant-in-the-room problem," Smith said. And it "often comes with pretty substantial emotional bias."
All but one of Latigo Peak's five portfolios, which come in a range of risk profiles, have outperformed the S&P 500 since inception and over the one-, three- and five-year periods ending Sept. 30, according to a client presentation reviewed by The Wall Street Journal.
Clients must have at least $10 million invested with the firm before it will consider allowing them to allocate money to its most aggressive strategy, which at times uses leverage to juice returns. New clients can put a maximum of 20% of their portfolio into it, though they may build up a substantially larger share in it over time as they reinvest returns.
One client invested $250 million with Scott in 2020 and has taken out $167 million over the years since. Their portfolio was worth $927 million as of April 30, according to a copy of their statement viewed by the Journal. The client, who had just over three quarters of their portfolio in the most aggressive "tactical growth" strategy, had more than 16% in Nvidia and nearly 10% in Broadcom.
"These portfolios do get concentrated. That's really kind of what you want," Scott said. "The question is how do you protect yourself on the downside? In my view that's being really disciplined about when you sell."
Scott, a 71-year-old former Navy pilot who lives in Bellevue, Wash., launched his most conservative portfolio in 1986.
Atwood, now 65, met Scott in the late 1990s when both were at Merrill Lynch. Atwood, who lived in Boston at the time, started allocating some of his clients' assets to Scott's portfolios in 2000. Latigo Peak, based in Palm Beach Gardens, Fla., is the merger of their two practices.
The firm is a throwback to an earlier era when wealth advisers actually picked stocks. Most now allocate client assets to other managers, often via customizable model portfolios. Scott runs a nine-person investment committee that selects about 30 stocks for each investment strategy based on fundamental analysis. Contenders for the most conservative portfolio, for example, must have a high dividend, strong revenue growth and high margins.
Latigo Peak uses moving averages and other technical indicators to determine its criteria for selling stocks. Scott believes investors don't typically find out something is wrong with a company until after its stock falls. Clients made a lot of money on Nike, Docusign, Netflix and Lululemon, but all have been cut from its portfolios after hitting the sell criteria.
Scott said it isn't uncommon to get calls from nervous clients, particularly new ones, on days when the market sells off as it did Thursday. He typically points them to the firm's reliance on its sell criteria, rather than emotions or momentum. The Thursday selloff prompted four stocks to meet Latigo Peak's sell criteria, though Nvidia, Broadcom and Dell weren't among them.
Some clients have an appetite for risk. George Solich, 65 years old, has spent his entire career in the upstream oil-and-gas-exploration business.
"I've seen every bit of risk you can possibly think about," said Solich, who lives in Denver and is the CEO of FourPoint Energy. "We take a very technical data-driven approach to our business to mitigate risk. Phil doing the same thing with his business got me comfortable."
Steve Hooper has a sizable chunk of his money in Latigo Peak's most conservative strategy, which generates income that the 73-year-old and his wife have lived off since his retirement. The rest is in the most aggressive strategy.
"We do have a few stocks that have appreciated incredibly, but if they have a hiccup, it's not like it's the whole portfolio," said Hooper, a retired venture capitalist.
The break with JPMorgan wasn't Scott and Atwood's first run-in with a bank compliance department. Bank of America bought Merrill in 2009 and allowed the wealth business to operate largely independently for nearly a decade. When it finally took a closer look, it flagged their portfolios as too concentrated.
While at Merrill during the financial crisis, a few clients filed complaints with regulators about Scott's investment recommendations, which he has denied and tried unsuccessfully to get expunged.
Atwood and Scott left Merrill and joined First Republic in 2018 and 2020, respectively. Executives reviewed and approved the portfolios at the time. Then in the spring of 2023, JPMorgan bought most of First Republic's assets after it experienced a bank run and was seized by federal regulators.
A committee at JPMorgan initially approved Scott's portfolios. But they remained too concentrated for the bank's liking. In addition to the concentration levels, JPMorgan objected to the use of margin debt.
Scott and Atwood thought they might be able to convince the bank to let them continue if they hired a dedicated compliance officer or had their clients sign a letter, acknowledging the risks. But the bank was firm.
Unable to work on the spinout on JPMorgan's dime, the advisers worked nights and weekends for more than seven months to get Latigo Peak set up. Last month, as the AI trade was showing signs of wear and tear, they left JPMorgan.
"These are large firms, and they have to make these decisions," said Atwood. But "one of the reasons the portfolios have done so well is that we let our winners run."
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