Global Investing

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.

Bah Humbug

Value managers and contrarian analysts long derided as permanent bears have been poking their heads out of the woods to bring some early Christmas cheer to delegates assembled at the CFA Institute’s European Conference in Amstedam.

James Montier, global strategist at SocGen, who likes to swim with sharks in his spare time, opened the conference on Tuesday by saying that he was more optimistic about equities than he had been for a long time, with the UK and European markets approaching bargain basement prices.

But on day two, Matt King, managing director, credit products strategy at Citigroup, rained all over this parade. “I have a message for equity investors,” he said. “It’s worse than you think!”