It’s always interesting to examine the top holdings of an individual mutual fund. But examining the top holdings of hundreds of mutual funds is far more riveting: What is the smart money up to?
RBC Dominion Securities has lifted the lid on 778 actively managed U.S. large-cap funds that take long-only positions (no short-sellers here).
And what we get is a deep look at the most popular U.S. stocks today, along with an indication of how fund managers are adjusting their portfolios during an unusual period of rising interest rates, global economic acceleration and market volatility.
Who knew that Microsoft Corp. is the go-to name among the pros?
The venerable technology company, perhaps less loved among consumers than Apple Inc. or Alphabet Inc., is held by 67 per cent of funds. That’s above the 62 per cent of funds that hold either Apple or Alphabet (which owns Google).
What’s more, a net four funds added Microsoft to their portfolios during the first quarter of 2018, while 12 funds unloaded their positions in Apple and five funds unloaded Alphabet, which suggests that fund managers may see better prospects in a company that makes computer operating systems over, say, iPhones and online advertising.
Whether the smart money is right to side with Microsoft and these other so-called lions of large cap, is open to debate of course.
Indeed, investors can take RBC’s report in one of two directions: They can follow professional fund managers in the hope that these pros know what they’re doing; or they can move in the opposite direction on the premise that popular stocks are overbought and at risk of a reversal.
RBC equity analyst Lori Calvasina acknowledged as much.
“In our experience, crowded names among active managers are usually crowded for a reason (good fundamentals). That being said, we still think positioning is a risk factor worth monitoring,” Ms. Calvasina said in the report.
While Microsoft is the most frequently owned stock, RBC has taken a number of other approaches to determine stock popularity.
For example, it also looked at stocks that had the greatest number of overweight positions (that is, relative to weightings within the S&P 500).
JPMorgan Chase & Co. wins this popularity contest: 50 per cent of funds are overweight. the banking giant. JPMorgan is followed by Alphabet, Microsoft and Cisco Systems Inc.
Looking only at growth funds – mutual funds that focus on companies with high profit expectations – Visa Inc. stands well above its peers: 71 per cent of growth funds are overweight the credit card and payments company, relative to the Russell 1000 index.
Amazon.com Inc. ranks second, with 60 per cent of funds overweight the stock. Adobe Systems Inc. is third, at 59 per cent.
For value funds – mutual funds that focus on companies that look cheap relative to their intrinsic value – JPMorgan and Microsoft are tied: In both cases, 51 per cent of funds are overweight these two stocks. Citigroup Inc. and Cisco aren’t far behind, at 47 per cent and 46 per cent, respectively.
Interestingly, RBC also looked at which stocks are being added by the largest number of funds, which is an approach that leads away from the usual suspects by focusing on hot prospects.
Nektar Therapeutics, a San Franciso-based biopharmaceutical firm, was added to 21 funds in the first quarter, even though just 3 per cent of large cap funds own the stock.
But are managers chasing performance? Nektar shares have surged more than 50 per cent since October (though it is off its highs in March), reflecting the company’s promising pipeline of cancer-fighting drugs.
Nvidia Corp., another hot stock because of the company’s importance to autonomous vehicles and artificial intelligence, was added to 20 funds. Activision Blizzard Inc., which makes video games, ranks third.
If you’re more interested in what the smart money is ditching, RBC has something for you contrarians as well: Stocks that have been unloaded by the most funds.
RBC calls these stocks “setting suns”, and they’re led by Celgene Corp., General Electric Co. (full disclosure: I own this stock) and Aetna Inc.
The smart money is fleeing − for now.
David Berman