What has the average value investor been buying?
Jeff Shacket, vice president of Thomson Reuters’ Corporate Advisory Services, writes:
“With the Dow up nearly 180 points today (and up nearly 850 points from closing low on March 9), the bulls are hopeful that we are seeing the seeds of a sustained rally – one driven by long-term investors finding fresh values, not hedge funds covering their short positions.
“Of course, one could argue that the market offered plenty of good values during late 2008 as the Dow hovered around 8500 following the 2500 point plunge in mid-October. Exactly when a stock’s combination of valuation, fundamentals, and outlook will combine to trigger a decision to buy varies from firm to firm.
“Nevertheless, we dug into the portfolios held by a representative set of traditional value investors to see which stocks they purchased during 4Q08 and how they positioned themselves for 2009. Specifically, we looked at six asset management firms (primarily pension managers) and four mutual funds. Collectively, they controlled more than $90 billion in equity assets as of 12/31/08 with an average annual turnover rate of just 42 percent. Here’s what we found:
“1. The group’s aggregate investment decreased in six of the eleven major economic sectors. The largest decreases in exposure (a combination of share purchases/sales and price movements) were in Financials (down $2.0 billion or 12 percent) and in Materials (down $1.4 billion or 29 percent). The largest increases in net exposure occurred in Energy (up $1.6 billion or 19 percent) and Industrials (up $700 million or 7 percent). Even with the net reduction, Financials remain the second largest sector in the portfolio at roughly 16 percent. Consumer Discretionary stocks rank first, accounting for 17 percent.
“2. The ten underlying portfolios are relatively concentrated, with most holding fewer than 150 stocks. However, among the more than 1300 stocks held by the group, there is very little overlap. Only 43 stocks were held by at least four of the ten portfolios. The most widely held were Viacom, JPMorgan, and Pfizer, but the group reduced its exposure to all three. Among the widely held names, the group aggressively increased its exposure to insurance provider MetLife and two oil services companies, Halliburton and BJ Services. Two regional bank stocks, Fifth Third and Wells Fargo, also ranked among the popular names that saw net increases.
“3. Many Dow stocks ranked among the widely held names, but the group slashed its investments in GE, Pfizer, JPMorgan, Home Depot, AT&T, Microsoft, Citigroup, and Exxon by 20 to 55 percent. The group also reduced its exposure to Bank of America and Kraft. Merck was the only widely-held Dow component that saw a significant net increase in exposure.
“4. The group reduced its exposure to stocks listed on European exchanges, but increased exposure to Asia and Latin America. However, exposure to each of those regions is minimal.
“5. Generally, the group made focused investments. Consider the traditionally defensive healthcare sector. Collectively, the group owns roughly 75 healthcare stocks, and it reduced net exposure by roughly $1.0 billion. However, in five stocks (Abbott Labs, Merck, Novartis, Aetna, and WellPoint), the group increased its exposure by nearly $800 million. In Consumer Discretionary, where the group owns more than 200 stocks, an aggregate net decrease of $700 million includes five stocks (JCPenney, Liberty Media, Marriott, Phillips, and Omnicom) that saw a net increase of nearly $1.0 billion. In the Energy sector, ten of the roughly 150 stocks held by the group saw net increases of more than $100 million, led by Chesapeake Energy (+$500m). Together, these ten Energy stocks account for the entire aggregate net sector increase ($1.9 billion > $1.6 billion).
“Stitching these elements together, we can create a profile of the average value investor. First, and not surprisingly, the average value investor is making some contrarian bets, keeping money in the battered financial sector, or expecting the consumer to come back, or looking past falling commodity prices.
“The average value investor likely moved into the Dow stocks early in 2008 when the subprime crisis first pulled the broader market lower. The biggest blue chips looked stable and relatively cheap. However, when the housing troubles triggered the credit crisis which in turn slammed the brakes on the global economy, thus hurting revenue and earnings forecasts for large multi-nationals, then the average value investor moved out of the Dow and into second-tier names, looking for temporarily tarnished gems.
“The average value investor is a stock picker who maintains a concentrated portfolio. A widespread pullback in stock valuations did not spark widespread buying. Instead, the average value investor aggressively purchased a select few stocks that were suddenly trading well below their intrinsic worth and seemed best poised to get back on track.
“In the end, though, there is no average value investor. The lack of overlap among these firms and funds confirms what we in Corporate Advisory Services have long counseled our clients – namely, that buy/sell decisions are not explained solely by general investment style. Instead, each investor employs a distinct approach that is defined by preferences for certain stock fundamentals and by qualitative factors (e.g., management quality, industry position, etc.) particular to the company in question.
“Understanding where (in sector terms) value-oriented assets are flowing can provide wide guideposts for investor outreach. However, the most effective investor relations programs seek to understand the specific dimensions of each portfolio and the discipline of each portfolio manager. Let us know if we can help you reach the right investors.”
For this study, the six asset managers were: Dreman Value Management; Institutional Capital; NWQ Investment Managers; Pzena Investment Management; Southeastern Asset Management; and Sound Shore Management. The four mutual funds were: the Keeley Small Cap Value Fund; the Lord Abbett Mid Cap Value Fund; the Mutual Shares Fund; and the T. Rowe Price Value Fund.