Tuesday, August 25, 2020
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A great FAAMG divide.
As readers of the Morning Brief are well aware by now, the FAAMG trade is the defining bet of this current market.
But not every investor is enjoying the spoils of a massive rally from the world’s biggest tech firms.
In a note to clients published Friday, David Kostin, chief U.S. equity strategist at Goldman Sachs, outlined the notable divergence between mutual fund and hedge fund investors when it comes to bets on the FAAMG names — Facebook (FB), Apple (AAPL), Amazon (AMZN), Microsoft (MSFT), and Alphabet (GOOGL, GOOG).
Hedge funds love this trade while mutual funds are shying away.
“Positioning differences in FAAMG have contributed to the performance gap between hedge fund and mutual fund favorites,” Kostin said.
Kostin notes that Goldman’s “VIP basket” of stocks most popular among hedge funds has outperformed the S&P 500 by 13% so far this year while a similar basket of stocks overweighted by mutual funds has lagged the S&P 500 by 7% this year.
“FAAMG have been constituents of our Hedge Fund VIP basket for 23 consecutive quarters,” Kostin writes.
“In addition, FB, AMZN, MSFT, and GOOGL have ranked in the top five of the list for 12 straight quarters. However, in part because of the stock weight limits, large-cap mutual funds are 500 [basis points] underweight FAAMG in total... More broadly, hedge funds carry a record tilt away from (hate) value stocks while mutual funds carry a record tilt toward (love) value stocks, weighing on the YTD performance of mutual funds.”
And so while the rotation in markets earlier this month saw money move into value and cyclical trades more favored by mutual funds and shunned by hedge fund investors, last week’s rally to record highs was fueled by the FAAMG names that have supported the market since the late-March bottom.
In July, we noted that betting on big cap tech stocks was the market’s most popular trade that investors loved and feared at the same time. Bank of America’s global fund managers survey for August revealed that bets on big cap tech stocks remained the most crowded trade, but retreated from July’s historic herding. (In August, concerns about crowding in gold grew among respondents to Bank of America’s survey.)
Hedge fund investors, it seems, have been able to hold their nose and buy the popular big tech names and have enjoyed a market-beating year as a result. Mutual funds have not enjoyed the same success.
But not all is lost for mutual fund investors as there are still areas of their portfolios that have significant overlap with the hedge fund crowd. And these names have held up better than the market this year.
“At the stock level, ‘shared favorites’ among both hedge funds and mutual funds have outpaced S&P 500 by 106 bp this year (+7% vs. +6%),” Kostin writes. And other the last few years, these names preferred by both hedge funds and mutual funds have handily outperformed the market.
“We define shared favorites as stocks that screen into both our Hedge Fund VIP and Mutual Fund Overweights baskets. Shared favorites underperformed during the bear market in 1Q (-37% vs. -34% for the S&P 500), but have outperformed by 3 pp during the past five months (+55% vs. +52%) as investors have added length in the rebounding market.”
And while these “shared favorite” names might not be the FAAMG stocks exactly, the themes driving this market are still clear — bets on the cloud and the consumer are (for the most part) winning the day.
The nine “shared favorite” names among hedge funds and mutual funds? Adobe (ADBE), Alexion (ALXN), Citi (C), Comcast (CMCSA), salesforce.com (CRM), Lowe’s (LOW), Mastercard (MA), ServiceNow (NOW), and Visa (V).
What to watch today
9:00 a.m. ET: FHFA House Price Index MoM, June (0.3% expected, -0.3% in May)
9:00 a.m. ET: S&P CoreLogic Case-Shiller Home Price Index 20-City MoM, June (0.1% expected, 0.04% in May)
9:00 a.m. ET: S&P CoreLogic Case-Shiller Home Price Index 20-City YoY, June (3.6% expected, 3.69% in May)
10:00 a.m. ET: Conference Board Consumer Confidence, August (93.0 expected, 92.6 in July)
10:00 a.m. ET: New home sales, July (785,000 expected, 776,000 in June)
10:00 a.m. ET: Richmond Fed Manufacturing Index, August (10 expected, 10 in July)
6:30 a.m. ET: Hormel (HRL) is expected to report adjusted earnings of 35 cents per share on revenue of $2.35 billion
7:00 a.m. ET: Best Buy (BBY) is expected to report adjusted earnings of $1.05 per share on revenue of $9.79 billion
7:00 a.m. ET: JM Smucker (SJM) is expected to report adjusted earnings of $1.68 per share on revenue of $1.81 billion
4:00 p.m. ET: Intuit (INTU) is expected to report adjusted earnings of $1.09 per share on revenue of $1.55 billion
4:00 p.m. ET: Autodesk (ADSK) is expected to report adjusted earnings of 90 cents per share on revenue of $899 million
4:05 p.m. ET: Salesforce (CRM) is expected to report adjusted earnings of 67 cents per share on revenue of $4.9 billion
4:05 p.m. ET: Nordstrom (JWN) is expected to report an adjusted loss of $1.52 per share on revenue of $2.28 billion
4:05 p.m. ET: Hewlett Packard Enterprise (HPE) is expected to report adjusted earnings of 23 cents per share on revenue of $6.08 billion
AstraZeneca launches new coronavirus prevention and treatment trial [Yahoo Finance UK]
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