By Brett Arends
It takes a lot of time, money, education and training to get this bad
You can't make this stuff up.
The world's top money managers just told a monthly survey that they are dumping their investments in commodities--gold, copper, oil, and so on--like a bad habit. BofA Securities reports the biggest stampede out of plummeting commodity futures in at least a decade. With commodity futures down nearly 10% since the start of the year, money managers are now gloomier about them at any time since May 2020--when the new Covid pandemic had frozen the global economy.
One of these money managers' top investment picks for 2023, when they were surveyed back in January? Commodities.
The same M.B.A., CFA, Ph.D. geniuses are now pulling their long-suffering clients' billions out of emerging market stocks as well. They are worried about risks like an implosion of the Chinese real-estate market, and they are frustrated by the dismal returns from emerging markets recently. Emerging markets have been the worst performing region of the global stock market so far this year.
Another of these managers' top picks for 2023, when they were asked back in January? Emerging markets.
With technology stocks up big time since the start of the year, and energy stocks down, the three-letter crowd now have their clients heavily invested in tech stocks, and lightly invested in energy stocks.
Back in January? Energy stocks were one of their favorite picks for the year. One of the least favorite? Er...technology stocks.
It takes a lot of time, money, education and training to get this bad. Top business schools charge $150,000 for a two-year M.B.A. program. Financial analysts' qualifications take several years of intense study. And the survey isn't just covering fringe individuals. In total, about 250 money managers and asset allocators from around America and the rest of the world answer the survey, and together they are managing more than $600 billion on behalf of their clients. The monthly BofA Securities global fund manager survey, which began life as the Merrill Lynch survey and has been running for decades, is the most authoritative of its kind.
As regular readers know, here at MarketWatch we offer a free service called Pariah Capital. It consists of reading these surveys, looking at where these brilliant big money honchos are placing their bets, and then...doing the exact opposite. Pariah Capital buys what the top money managers hate, and avoids what they love.
And to keep it useful for readers, we only use regular exchange-traded funds that anyone in can buy. We don't involve hedge funds, individual stocks, or fancy derivatives. It's all just plain ol' regulated ETFs.
And, as so often, Pariah Capital's simple portfolio is crushing it.
Since the start of the year, Pariah's eight ETFs have earned an average return of 15.9%. In less than six months. That's more than the U.S. stock market indexes overall: Even the State Street SPDR S&P 500 ETF Trust (SPY), which tracks the booming S&P 500 large cap index , trails behind our portfolio by more than a full percentage point, at 14.7%. The broader Vanguard Total Stock Market Index ETF (VTI), which includes midsize and small companies and is a better reflection of the overall U.S. equity market, is 2.5 percentage points back at 13.3%. The global stock market index--as measured by the Vanguard Total World Stock ETF (VT)--is up 12%. A so-called "balanced" portfolio of 60% U.S. stocks (VTI) and 40% U.S. bonds (AGG) is way behind at 9%. And what might be considered the most plain-vanilla investment portfolio of all, 60% global stocks (VT) and 40% inflation-protected U.S. Treasury bonds (TIP), is up 8%.
That's half Pariah Capital's return.
Pariah's eight funds? Vanguard Total Stock Market (VTI), Franklin FTSE United Kingdom (FLGB) and Japan (FLJP), Vanguard Real Estate (VNQ), Fidelity MSCI Utilities Index (FUTY), Fidelity MSCI Communications Services (FCOM), Consumer Discretionary Select Sector SPDR (XLY) and Technology Select Sector SPDR (XLK).
To clarify: These ETFs were chosen only by looking at what the big money managers were avoiding the most, and buying those assets. There was no other input. No "overlay" or adjustments. Nothing.
Meanwhile, how are those geniuses doing? A portfolio of these big money managers' favorite investments, as measured by another eight simple, readily-accessible ETFs, is actually down 2% so far this year.
No, really: Their favorite picks lost money while the market was going up.
We're not using hindsight bias here. I wrote about this back in January. And the year before that.
Pariah Capital has made its biggest money this year in technology stocks (the Technology Select Sector SPDR Fund (XLK) is up 37%), communications stocks (the Fidelity MSCI Communication Services Index fund (FCOM) has risen 28%) and consumer discretionary stocks (the Consumer Discretionary Select Sector SPDR fund (XLY) is up 27%. All three were being shunned by money managers in January. It also made good money on Japanese stocks (the Franklin FTSE Japan fund (FLJP) has risen 16%) and on U.S. stocks, both of which were comparatively unpopular with the big money crowd in January. Both have beaten the global index.
Only one of Pariah's eight picks has lost money so far: Utility stocks. The Fidelity MSCI Utilities Index fund (FUTY) has lost 5.4%.
What about the big money crowd? Among their favorite picks at the start of the year were banking stocks (the SPDR S&P Bank ETF (KBE) has since lost 18%), commodities (the iShares S&P GSCI Commodity Indexed Trust (GSG) has fallen 9.7%) and energy stocks (the Energy Select Sector SPDR Fund (XLE) has lost 8%). Their best pick was a bet on Europe: The SPDR EURO Stoxx 50 ETF (FEZ) has gained nearly 19%. But it wasn't enough.
As an alternative to Pariah Capital, back in January we also offered a portfolio of eight low-cost ETFs based on the opposite principle: Namely, investing in the things the big money crowd liked the most. In addition to the four just mentioned, these were the Goldman Sachs Access Treasury 0-1 Year ETF (GBIL), the Vanguard FTSE Emerging Markets ETF (VWO), the Healthcare Select Sector SPDR (XLV), and the Consumer Staples Select Sector SPDR ETF (XLP).
I shouldn't have to add, but I will, that this is a tongue-in-cheek exercise. Buying a diversified portfolio of the assets that global money managers hate the most is not the craziest thing in the world, but I wouldn't recommend it unless you know what you are getting into and are prepared to take the rough with the smooth. If I weren't writing about this for a living I'd probably invest in Pariah Capital myself, but only with a fraction of my retirement portfolio.
There is method in this madness. These money managers aren't really dummies. But they are doomed by their situation. They pretty much all went to the same schools, read the same news and data, and run the same financial models. So they pretty much all reach the same conclusions. Meanwhile they are subject to the constraints of their organizations, careers and industries. It is much more sensible for them, if not always for their investors, to stick together. If they all invest in the same things there is far less risk of embarrassment, being fired, or being sued when things go wrong.
Which means they are typically all invested in the same things at the same time. And when you realize that's true of most of the world's big money managers, you realize that the people who are trying to beat the market also make the market, because they swing most of the volumes. So they are trying to beat themselves.
Almost by definition, any investment class they are already bullish on has already risen a long way in price, precisely because they are all bullish and have been buying. The investments they hate have already been dumped, and have fallen.
Where does this leave us now? The latest survey shows these guys are already heavily invested in technology stocks, and are now underinvested in energy stocks and in commodities. Make of that what you will. The survey also reports that they are very, very heavily invested in investment-grade corporate bonds. Bad news for iShares iBoxx $ Inv Grade Corporate Bond ETF (LQD)? We shall see.
Meanwhile the survey reports these people are most bullish of so-called "alternatives," meaning high-fee funds like hedge funds and private-equity funds. In other words, they want to give more of their clients' money to people just like them, and give them a freer hand. Heaven help us.
-Brett Arends
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06-17-23 1111ET
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