Drum roll, please.
For the past three years, around this time, I’ve been telling you what the world’s top fund managers own and what investments they are shunning. Each time, I’ve offered the rogue thought that a portfolio consisting entirely of the latter—the stuff they hate—is probably going to crush the market over the next 12 months.
And each time, it’s turned out right. And then some.
This portfolio of the most hated assets on Wall Street, which I call “Pariah Capital,” earned a stunning 26% return in 2023.
A “balanced” global portfolio, made up of 60% global stocks
VT
and 40% global bonds
BNDW
? A full 10 points less, or 16%. (A U.S.-only equivalent of the “balanced” portfolio, consisting of 60% S&P 500
SPY
and 40% U.S. bonds
AGG,
earned 17%.)
Meanwhile, a portfolio consisting of those fund managers’ favorite investments? Just 5%. Dismal. More than 20 points below Pariah Capital, and more than 10 points a balanced index.
This isn’t a one-off. This Pariah Capital strategy beat the global index by seven clear points in 2022 and five in 2021 (when we first started reporting on it annually).
Put another way, over the past three years Pariah Capital has generated a total return of 32%. That’s more than four times the 7% total return earned by the global balanced portfolio, and three times the 11% earned by its U.S.-only equivalent.
(Though I’ll give credit where credit is due—in the 2022 bear market their top picks did outperform both Pariah and the indexes, eking out a 5% gain.)
There is a method to this madness. Every month BofA Securities, formerly Merrill Lynch, polls the world’s top money managers: Pension fund managers, mutual-fund managers, endowment managers and so on. It usually speaks to more than 200 big money honchos around the world, handling in aggregate around $600 billion in assets.
And it reports on what they think, and what they own in their funds.
The problem for these people is twofold. First, because they all go to the same business schools, get the same training and certification, and because they all have enormous career incentives to go along to get along, they typically think and act alike. And, second, if they are already heavily invested in a particular asset, they—and all the other money managers who think like them—have already driven up the price, which will reflect their bullish outlook.
Or, to put it another way: The assets that these fund managers love are already in a seller’s market (with prices to match). Meanwhile the assets that they hate are in a buyer’s market (ditto).
Pariah Capital pays no attention whatsoever—none—to what these guys say about the markets or the global economy or the future. It looks only at what they own.
Last year, among other things, these guys were underinvested in technology stocks (Technology Select Sector SPDR ETF
XLK
then rose a staggering 56% during 2023), telecom services (Fidelity MSCI Communication Services ETF
FCOM
rose 45%) and consumer discretionary stocks (Consumer Discretionary Select Sector SPDR ETF
XLY
rose 40%). Among global markets, their least favorite was the U.S.A., which then outperformed, the Vanguard Total Stock Market ETF
VTI
rising 26%.
Meanwhile among their favorite assets the only one that performed well was their bet on Europe—the SPDR euro Stoxx 50 ETF
FEZ
rose 27%.
So, what does the future hold for 2024?
Remember, first off, that this is a tongue-in-cheek exercise. Follow it at your own risk. Also, after three straight years of success Pariah Capital must surely be due a year of underperformance. Caveat emptor: Buyer beware.
Nevertheless, the first BofA Securities’ Global Fund Manager survey of 2024 has just dropped. It lists the big-money crowd’s top picks and pans for the year.
As ever, the most interesting part is what they are shunning: What they don’t own. The survey lists eight assets where the fund managers are, in total, significantly “underweight in absolute terms.” By far the biggest underweight is in U.K. equities. The others are utility stocks, banks, insurance stocks, eurozone stocks, energy stocks, real estate, and consumer discretionary stocks.
This raises a number of issues.
First, it’s all equities—no cash, no bonds. Yikes. That raises the risks. Even if you decide to take a gamble on this portfolio, adjust for your own temperament and circumstances. One major caveat is that while these fund managers are underweight these particular markets and sectors, they are overweight stocks in general—which is reason enough to be nervous. Someone running this type of portfolio at the hedge-fund level might combine it with a put option on the global stock market. The rest of us might just combine it with cash.
Second, some of these investments need some finesse. For example, to bet on the main London stock market index you can invest in the low-cost Franklin Templeton FTSE United Kingdom ETF
FLGB.
It charges just 0.08% in fees and invests in the top 100 or so stocks. But the London stock market is really weird. It is dominated by a small number of huge multinationals, like energy behemoths Shell
SHEL,
and BP
BP,
drugs giants AstraZeneca
AZN,
and Glaxo
GSK,
and bank HSBC
HSBC,
And so that’s mostly what you get: The 10 biggest companies make up nearly half the portfolio. Problem is, that’s not really a bet on the U.K. economy or on stocks that are “British” in anything but name. Rio Tinto is headquartered in London but it’s a global mining company. And so on. So there is a case for splitting a U.K. bet into two funds: Half in FLGB and half in iShares MSCI United Kingdom Small-Cap ETF
EWUS,
which is more broadly spread across about 250 midsize and smaller companies. The latter, alas, charges 0.59% in fees.
Third, while fund managers are underweight both banks and insurance, the ETF space for both is tricky because of the sectors’ complexity. Some “insurance” ETFs don’t include Warren Buffett’s Berkshire Hathaway
BRK.B,
for example. Some “bank” ETFs only include regional banks, and exclude the giants on Wall Street. Many ETFs in this area charge hefty fees. There is no perfect solution. Fidelity MSCI Financials Index
FNCL
charges just 0.8%. It is 16% insurance companies (mostly Berkshire) and 84% everything else.
But, with all those caveats, here is Pariah Capital’s portfolio for 2024.
It consists of 12.5% or one-eighth each in Vanguard Utilities
VPU,
SPDR S&P Insurance ETF
KIE,
SPDR euro Stoxx 50 ETF
FEZ,
Energy Select Sector SPDR Fund
XLE,
Invesco KBW Bank ETF
KBWB,
Vanguard Real Estate
VNQ
) and Consumer Discretionary Select Sector SPDR Fund
XLY,
plus either 12.5% in FLGB or (my preferred option here) 6.25% each in FLGB and EWUS.
Meanwhile, the latest survey shows that money managers are mostly heavily invested in the following eight assets: The stocks of healthcare, technology, industrial and consumer staples companies, the U.S., Japanese and Emerging Markets indexes, and cash. So a portfolio that followed them—which, with a hat tip to Will Smith in “Men In Black,” we can call “The Best of The Best of the Best (With Honors!)” Portfolio—would hold equal 12.5% amounts in healthcare Select Sector SPDR Fund
XLV,
Vanguard Information Technology ETF
VGT,
Industrial Select Sector SPDR Fund
XLI,
Consumer Staples Select Sector SPDR Fund
XLP,
Vanguard Total U.S. Stock Market
VTI,
Franklin FTSE Japan ETF
FLJP,
Vanguard FTSE Emerging Markets ETF
VWO,
and Goldman Sachs Access Treasury 0-1 Year ETF
GBIL.
Incidentally, for this exercise, for all the sector ETFs I have deliberately chosen the ones that only focus on the U.S. market. Readers tend to heavily prefer focusing on the U.S., and in these cases the fees are lower. But a purist would bet instead on sector ETFs that invested globally: For example iShares Global Energy
IXC
instead of XLE. But that’s another story.
Let the record show that the emerging markets indexes are now largely a bet on whether China is going to invade Taiwan: The two countries’ equities make up 50% of the index. Russia used to dominate Eastern European index funds, with disastrous results in 2022. If I wanted to bet on emerging markets broadly and avoid this issue, I’d look at alternatives. This, too, is another story.
How will Pariah fare in 2024? Stay tuned. As I said earlier, Pariah must be due a bad year. Even I, cynic though I am, cannot imagine that betting against the big-money crowd is going to beat the pants off the indexes every year. It can’t be that easy, surely?
This story originally appeared on Marketwatch
