The Top Tens – Mutual Funds and Hedge Funds

The Top Tens – Mutual Funds and Hedge Funds

 Wells Fargo remains the top holding of mutual funds, while Apple continues to
be the most owned by hedge funds. Continuing the new data collection method
instituted last quarter, Wells Fargo stayed the most owned stock by mutual funds
gaining an incremental top-ten holding at one mutual fund to end the quarter being held
at 18 funds. Apple also gained one position in the quarter to end at 17 funds, finishing
as the second most held stock at the largest-50 mutual funds followed by Merck, which
shared the top-spot in 2Q11. Meanwhile, Apple retained its position as the most widely
held name by hedge funds, having held this spot since 3Q10, followed by Google and
Microsoft. Interestingly, JP Morgan holdings fell precipitously in the quarter from the
second most held stock at 10 hedge funds to end 3Q11 held at four funds, finishing as
the 13th most owned name. We note that the top ten positions at hedge funds are likely
hedged by a short position, which are not captured on the top ten list tallies.
 Both mutual and hedge funds are most heavily weighted toward Technology
stocks within the 30 most held positions on the top-tens lists. Tech names
represented a fifth of the 15 most broadly held positions for mutual funds along with
Energy. Technology stocks also comprised a fifth of the 30 most held positions at
mutual funds followed by Consumer Staples and Health Care names, which gained
position in the quarter to represent 17% of the 30 most held stocks each. Hedge funds
were even more reliant on the Technology sector as 40% of the fifteen most owned
positions were in this group followed by 13% each for Consumer Discretionary, Energy,
Financials and Health Care. Tech and Financials names were also seen on over 50%
of the 30 most held stocks on the top-tens lists of hedge funds.
 Home Depot and Merck seem the most over-owned by mutual funds while
Qualcomm and Google are clearly most over-represented at hedge funds. When
calculating the ratio of top-ten listings to market value one can scan whether a largecap
name is over- or under-represented among portfolios. From this perspective,
Home Depot, Merck, Wells Fargo and Phillip Morris rank as over-owned for mutual
funds. For hedge funds, Qualcomm, Google and Visa are the most over-owned.
Meanwhile, when looking at the 50 stocks with the largest market cap in the S&P 500,
Visa, 3M, Caterpillar, and Goldman Sachs were not represented within mutual funds,
while VZ, PEP, COP, ABT, UTX, BAC, UPS, MO, BMY, AXP, HD, AMGN and CAT were
not held on the top-tens list for any of the largest-50 hedge funds.
 Apple remains the most held stock for growth and value hedge funds, while
Wells Fargo continues to be the most owned for value oriented mutual funds,
and Apple took over the top spot for growth mutual funds. Although, a clean
comparison between the various investment styles of the firms analyzed is not possible
due to the heavy weight toward value funds, we gleaned some interesting results. The
fact that Apple retains the top spot for both value and growth hedge funds may imply a
degree of consensus in the hedge fund universe and possibly a break from some firms’
traditional investment style.

3Q11 Mutual and Hedge Funds Top Ten List Review

Beginning last quarter, we developed a new method for aggregating the top
holdings of the largest-50 actively managed mutual funds by asset-size, which also
allows us to screen for the top holdings of the largest-50 hedge funds. The goal is to
help us identify larger-cap stocks that may be over- or under-owned within the
equity mutual and hedge fund universe. Interestingly, despite very poor equity
performance in the quarter, more than 40% of the 30 most widely held stocks on
mutual funds’ top-ten lists gained positions in 3Q11, while 37% of the 30 most held
stocks at hedge funds also picked up positions, implying growing consensus within
the investment community. Unfortunately, this data is only available with a notable
lag, so the improved equity market trend thus far in 4Q11 for S&P 500 constituents
likely has affected the portfolio mix to some degree.
Portfolio weightings of the top ten holdings for the largest-50 equity mutual funds
have stayed biased towards Information Technology and Energy stocks, with 20%
of the 15 most held stocks in each of these sectors. Meanwhile, 20% of the 30 most
held stocks are in the Tech sector followed by 17% in Consumer Staples and Health
Care each (see Figure 1). Hedge funds are even more heavily concentrated in the
Tech group with 40% of the 15 most held stocks residing in this sector and 37% of
the 30 most held positions (see Figures 2). Financials now represent the second
most held sector for hedge funds as well comprising five stocks of the 30 most held
names, meaning Tech and Financial equities represent better than 50% of the 30
most held positions. Interestingly, Financials improved its representation on the top
ten lists despite the sector performing the second worst within the S&P 500 during
3Q11, down 23.1% versus the S&P 500 down 14.3%, only outperforming Materials,
down 25.0%.
Wells Fargo remained in the top position for mutual funds during the third quarter, a
position it has held since 2Q10, when we began tracking mutual fund holdings by
this new method. Intriguingly, Wells Fargo gained holdings despite weak
performance, down 14.0% in the third quarter, only slightly outperforming the S&P
500. Apple was again the most widely held position on the top ten lists for US
hedge funds, a position it has maintained since 3Q10. However, Apple only gained
holdings on one top tens list in 3Q11 despite significantly outperforming to the S&P
500; up 13.6%, the best performing stock amongst the 30 most held at hedge funds.
A few notable stocks gained or fell in the number of top ten holdings for the largest-
50 mutual funds. General Electric gained four positions ending up on 10 top ten lists
at the end of the quarter despite underperforming the S&P 500, down 19.3%.
Meanwhile, JP Morgan’s holdings fell precipitously decreasing top-ten list
representation at five of the largest-50 mutual funds to end the quarter on nine lists
as the 13th most held name after being the fifth most held in 2Q11, likely due to a
26.4% stock price decline in the quarter.
Hedge funds experienced a more balanced shift in top holdings during the quarter
with 37% of the 30 most held stocks gaining positions. Google experienced the
most positive shift in holdings, now appearing on 11 top tens list versus six in 2Q11,
likely due to outperformance in the quarter (up 1.7% in 3Q11). JP Morgan holdings
also decreased significantly on the top-tens lists at hedge funds shedding positions
at six hedge funds to end the quarter on four lists after being the second most held
stock in 2Q11, due to poor performance. Citigroup also shed six positions on the
top-tens lists of the largest-50 hedge funds to end 3Q11 on three lists after being
down 38.5%.

Market Cap Review
One of the most useful ways to decipher this data, in our opinion, is to rank the S&P
500 constituents by market value and compare the top-ten holding tallies for similar
sized companies (see Figures 5 & 6). We used the market caps as of 9/30/2011
(matching the top-ten list data) to provide a clean relationship. A few of CIRA’s Buyrated
stocks stood out with limited mutual and hedge fund exposure compared to
companies of similar market cap size. For mutual funds, IBM (IBM.N; US$190.84;
1), Walmart (WMT.N; US$58.34; 1), Procter & Gamble (PG.N; US$64.84; 1), Oracle
(ORCL.O; US$31.90; 1), Intel (INTC.O; US$25.01; 1), Schlumberger (SLB.N;
US$77.15; 1), Bank of America (BAC.N; US$5.79; 1), UPS (UPS.N; US$71.95; 1),
Goldman Sachs (GS.N; US$99.82; 1) and US Bancorp (USB.N; US$25.94; 1) seem
under-represented, while, on the other, CIRA Buy-rated Apple, Google (GOOG.O;
US$625.65; 1) and Home Depot (HD.N; US$40.23; 1) seem overly represented when
compared to companies of similar size.
Meanwhile, for hedge funds, General Electric (GE.N; US$16.33; 1), Bank of
America, UPS, Kraft (KFT.N; US$36.51; 1), Occidental Petroleum (OXY.N;
US$98.22; 1), Bristol-Myers Squibb (BMY.N; US$32.83; 1), American Express
(AXP.N; US$48.78; 1), Home Depot and Amgen (AMGN.O; US$57.50; 1) have
limited-to-no exposure as a top ten holding compared with companies of similar
size, while Apple (AAPL.O; US$393.01; 1), Google and Qualcomm (QCOM.O;
US$54.49; 1) are widely held.

Top 50 Stocks in the S&P 500 by Market Cap

Concentration Ratio
Another approach to study the data is by dividing each stock’s top ten list tally by its
market cap (see Figure 7 & 8). Essentially, this methodology provides a quick way
to scan whether the largest-cap stocks are under- or over-owned. Again using the
third quarter end market cap values for the analysis, it appears that Home Depot,
Merck, Wells Fargo, Phillip Morris, Amgen, and United Health Group look overowned
for mutual funds, while Qualcomm, Google and Visa seem most overly
represented for hedge funds. Meanwhile, Visa, 3M, Caterpillar and Goldman Sachs
have no top ten representation at mutual funds despite being among the largest 50
stocks in the S&P 500 by market cap, while Verizon, PepsiCo, ConocoPhillips,
Abbott Laboratories, United Technologies, Bank of America, UPS, Altria Group,
Bristol-Myers Squibb, American Express, Home Depot, Amgen and Caterpillar
seemingly have no top-ten representation amongst hedge funds.

Top S&P 500 Stocks by Market Cap

Growth and Value Fund Holdings
We isolated growth and value oriented funds and examined their holdings for both
mutual and hedge funds. Of the original 50 mutual funds, 18 were designated value
funds while only eight were tagged growth funds. For hedge funds, of the original 50
polled, 29 are value oriented while 10 claim to be growth funds. Due to the disparity
in the number of funds for each style, it makes comparisons between the groups
difficult, but the data is helpful in determining positioning within these investment
styles. Apple, Google and Lululemon remain the top three holdings amongst growth
oriented mutual funds while Apple and Google were the top holdings for growth
oriented hedge funds. Meanwhile, Wells Fargo, Pfizer and JP Morgan remained the
top holdings for value mutual funds while Apple and Microsoft continued to be the
top holdings at value oriented hedge funds (see Figure 9). Interestingly, there was
some overlap between the top holdings of value and growth oriented hedge funds
almost indicating a growing consensus in the industry or possibly style drift.

Value and Growth Funds Holdings

Note that the negative sentiment on the Street is due to many mutual, pension,
sovereign wealth and hedge funds getting hurt alongside the major macro pullbacks
seen throughout the year. While many funds focus solely on bottoms-up analysis
and therefore theoretically should miss the macro developments that have been
driving the stock market, the fact that there is such consensus amongst top ten
holdings, it is hard to avoid getting caught in the fray. Diversification throughout the
industry might help to limit exposure to the non-systemic risk within the equity
market. As Figure 10 shows, the HFREX Equity Hedge Fund index has been highly
correlated with the S&P 500 over the past four years. While, hedge funds were able
to outperform during the pullback in late 2008/early 2009, these funds have not
flourished with the overall S&P 500 since March 2009. Interestingly, as the chart
shows, hedge fund performance has continued to trend lower since the early
October 2011 nadir while the S&P 500 has rallied possibly relating to the continued
consensus within the hedge fund industry. Currently, hedge funds are
underperforming the S&P 500 by the largest margin we have seen since the end of
2006.

S&P 500 vs Hedge Fund Performance