The holiday slowdown beckons. If you know what to look for, you can see it in mainstream financial media coverage.
This is the time of year when journalists start scrolling back through their inboxes looking for something — anything really. Sometimes, this’ll manifest in headlines derived from analyst notes sent around days (or even weeks) ago. It’s “old news.” Literally.
“Investors Overseeing $5 Trillion Are Betting That an Economic Recession Can Be Avoided,” one Tuesday headline declared. I took the bait. I clicked on it.
As it turns out, it was actually a recap of a recap. Bloomberg summarized a note from Goldman’s David Kostin, but Kostin’s note was in fact itself a summary of the bank’s quarterly hedge fund and mutual fund monitor, which looks at equity holdings across more than 1,200 funds with a combined $5 trillion in gross equity positions and AUM between them (as of October 1).
For those curious, here’s how this goes. Kostin’s weeklies are called “US Weekly Kickstart” and they’re published on Friday afternoon or Friday evening at the latest. On occasion, when the bank puts out a key piece of research during the week, Kostin’s weeklies are just summaries of that research. Sometimes, that entails Kostin summarizing himself. When a new installment of the hedge fund and mutual fund monitor comes out, Kostin summarizes that.
Bloomberg scrolled straight down to the fifth paragraph which sets up four summary bullet points. “Recession risk remains a concern for all investor categories [but] analysis of mutual fund and hedge fund portfolio holdings reveals that thematic, factor and sector exposures are consistent with expectations for a soft landing,” Kostin said.
It’s a little more nuanced than that, I’m afraid, but I’m loath to subject readers to a backward looking analysis of positions from September 30. The linked Bloomberg article revolved around this passage from Kostin’s summary:
Current sector tilts are consistent with positioning for a soft landing. Hedge funds and mutual funds are overweight cyclical sectors such as Industrials, Materials and Energy. Both hedge funds and mutual funds are underweight the defensive Utilities and Consumer Staples sectors. However, both fund types are also overweight Health Care, which we also recommend as an overweight position. Info Tech is the largest underweight exposure for both investor types, although they both increased exposure to the sector during Q3. Financials represents one sector where hedge funds and mutual funds hold different exposures: Mutual funds are overweight while hedge funds are underweight.
Again, it’s not entirely straightforward. Arguably, a soft landing would benefit tech shares to the extent i) they’ve been exposed this year as cyclicals in disguise, and ii) a less aggressive Fed into moderating inflation would entail a lower terminal rate, a less buoyant dollar and lower real yields. Of course, no recession probably means no new bond bull market, which would be bad news for tech assuming the sector is still just one big long-duration play, but you get the point: There’s nuance here.
Note that hedge funds still favor mega-tech. Microsoft, Amazon, Alphabet and Apple were (still) in the top 10 most important holdings for funds (updated list, below).
Mutual funds, by contrast, are underweight the group, according to Goldman’s analysis (-317bps for Apple, -107bps for Microsoft, -48bps for Amazon, -10bps for Alphabet).
Forced to pick an interesting tidbit from the cornucopia of “insights” from the bank’s painstaking review of fund positions, I’d go with the disparity between performance for the most popular hedge fund longs versus the most popular mutual fund overweights.
The figure (below) illustrates that disparity. It’s wide. Kostin called it “stunning.”
Over the past year, mutual fund overweights bested popular hedge fund longs by more than 30 percentage points.
You can probably guess what was behind that outperformance. 28% of hedge fund favorites are tech stocks. By contrast, half of mutual fund overweights are financials or health care shares. This hasn’t been the best year for Info Tech.
If you’re wondering whether the collective “wisdom” of mutual fund and hedge fund managers might’ve helped you outperform a low-cost index fund in 2022, the answer might be “no.”
Goldman derives a “shared favorites” list from stocks that screen into both the bank’s Hedge Fund VIP and Mutual Fund Overweight baskets. “An equal-weight basket of shared favorites has underperformed the S&P 500 by 3 pp YTD,” Kostin remarked, calling that “consistent with other periods of market stress.”
Although equity mutual funds and the L/S crowd did manage to outperform benchmarks and the broader market, the margin was modest. Macro funds, which were riding high coming into Q4, have stumbled recently as documented here on Monday.
