Follow the crowd. That has been the winning strategy for investors this year, with the 10 most overweight stocks held by active managers outperforming the most underweight stocks by 19% year-to-date, BofA strategist Savita Subramanian said Wednesday in a client note.
That outperformance—the highest spread over unloved stocks in a decade—comes as investors grow uneasy about the market’s concentration in a handful of stocks that have powered U.S. stock market gains. Typically, overcrowding in a stock is a contrarian indicator—but not lately, according to Subramanian’s analysis of what funds hold.
Broadly, funds have been neutralizing their positioning in most sectors against what could be a cloudier backdrop into the U.S. election, according to BofA’s analysis. Long-only funds have added modestly to their materials, utilities, consumer discretionary and real estate exposure over the last three months. There is one big exception: Both types of funds are still overweight communication services versus their benchmarks, with hedge funds even increasing their allocation, which Subramanian says still indicates high conviction in 2020s winners.
At this week’s Morningstar conference, Counterpoint Global’s Michael Mauboussin tried to show how the wisdom of crowds can turn into the wisdom of madness, using research to show that when investors jump on the bandwagon, it reinforces the trend. Asset prices keep going up. But, at some point, there are no buyers left, leading to a price crash. The question for the market, of course, is when will there be no more buyers?
In a separate briefing earlier this week, Scott Glasser, co-chief investment officer at ClearBridge, addressed the buzz in the technology sector and said that while the momentum behind some of the narrow winners is reminiscent of 2000, it isn’t 2000—and the recent correction, which he sees as ongoing, is a healthy one.
“In 2000, we had 6% bond yields and you had price-earnings ratios for the tech sector over 50; now we are at 25 for the sector as a whole. The Nasdaq 100 was 55% above its 200-day moving average; now it’s 30% above,” Glasser says. “I think there is fundamental justification [for tech]. Has it gotten overdone? Yes, and it’s correcting the excesses.” And Glasser said he still wants to own many of these companies over the next three to five years that benefit from cloud computing, digitization and home entertainment.
For those keeping track of the most unloved and loved stocks held by funds, here’s a list.
According to BofA, the 10 S&P 500 stocks that funds are the most underweight include real-estate companies like: Apartment Investment & Management (AIV), Regency Centers (REG), and Federal Realty Investment Trust (FRT), as well as Tiffany (TIF), Coty (COTY), UDR (UDR), A.O. Smith (AOS), WEC Energy Group (WEC) and Cincinnati Financial (CINF) and W.R. Berkley (WRB).
The 10 stocks that funds are most overweight, according to BofA: Baker Hughes (BKR), Netflix (NFLX), Northrop Grumman (NOC), NetApp (NTAP), Vertex Pharmaceuticals (VRTX), Chipotle Mexican Grill (CMG), Cigna (CI), EOG Resources (EOG), Hess (HES) and Equifax (EFX).
Write to Reshma Kapadia at reshma.kapadia@barrons.com
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