Over the weekend I was doing general research on the market and bookmarked three articles that I found of interest. All three had to do with hedge funds and their holdings. One looked at which tech stocks were most popular among hedge funds, one looked at which financial stocks were most popular, and one looked at what stocks were added and dropped by hedge funds in the fourth quarter of 2019.
Of course, this research took a different meaning after the 1,000 point drop for the Dow on Monday. The fears regarding the coronavirus hit global stocks hard as the virus is spreading faster than thought and it looks like it will have a greater impact on the global economy than most investors thought.
When the market opened on Tuesday morning, it looked like we would get a small bounce back after the carnage on Monday left the indices with their worst losses since the fourth quarter of 2018. The optimism didn’t last long and the market started selling off again about an hour in to the trading day and by the lunch hour, the indices were all down close to 1%.
I started reconsidering the article about hedge funds and whether or not I should write about something else given the selloff on Monday and early Tuesday. Instead of completely ditching the hedge fund story, I decided to merge it with the selling story.
A recent article from TheStreet.com focused on the moves major hedge funds made in the fourth quarter and their favorite holdings. One takeaway from the article that proved to be helpful for hedge funds during the selling on Monday was the dislike of energy stocks. That stance has actually been helping hedge funds since the beginning of the year as the energy sector has lagged the other sectors.
According to the article, none of the funds they looked at had an energy stock in its top five holdings. There was some action taken in the fourth quarter, but none of the additions were enough to put an energy stock in to the top five. The article included moves made by Berkshire Hathaway which isn’t really a hedge fund, but it is obviously a fund worth tracking. Berkshire added to its Occidental Petroleum (NYSE: OXY) holdings during the fourth quarter and it added to its position on Suncor Energy (NYSE: SU). The fund cut its holdings in Phillips 66 (NYSE: PSX).
Appaloosa cut its holdings in the SPDR S&P Oil & Gas Exploration and Production ETF (NYSE: XOP) during the fourth quarter.
**Please note the chart reflects returns through the close on Monday, February 24.
In the selling on Monday and early Tuesday, the energy sector was the worst performer of the main sectors with a drop of 6.7%.
The financial sector was another group that wasn’t very popular among the funds with only Berkshire having much of a stake in the sector. Approximately 30% of the portfolio is invested in Wells Fargo (NYSE: WFC), Bank of America (NYSE: BAC), and American Express (NYSE: AXP). It is worth noting that the fund trimmed its positions on Wells Fargo, Goldman Sachs (NYSE: GS), and Bank of New York Mellon (NYSE: BK) during the quarter.
The financial sector was in the middle of the pack in terms of its performance on Monday and early Tuesday. The sector was down 4.48% at last look.
You could say that the general consensus from the funds got it right by staying away from the energy sector and by not being too committed to the financial sector. One area where they got it wrong was with the tech sector. Almost every fund TheStreet looked at had a tech stock in its top five holdings or in its top buys. The exceptions were Pershing Square and Greenlight. Appaloosa was extremely bullish on tech with all of the top five holdings being from the sector.
The tech sector had been the top-performing sector from the beginning of the year through February 20, but the sector took a pretty good hit on Friday and again on Monday and Tuesday.
The tech sector’s loss on Monday and early Tuesday was the second-worst performance at -5.44%.
My take from this research is that the hedge funds (and Berkshire Hathaway) seemed to be positioned relatively well for the pullback. They were right to be less than enthusiastic about financials and shying away from energy stocks has proven to be a good choice. Being heavily invested in tech served the group well through the first half of the first quarter, but if they didn’t make changes and take profits, the bullish stance has hurt them in the last few days.
These are professional investors that in many cases have been investing and trading for many years. They didn’t get everything right and they didn’t get everything wrong. They were positioned pretty well and that is how we should all strive to invest. You aren’t going to get every trade right and hopefully, you don’t get every trade wrong. Try to position yourself such that you can take advantage when the market is going up, but be diversified enough to miss the stocks and sectors that take the biggest hits when the market goes down.
certainly want to stay away from energy stocks now that the USA is Energy INDEPENDENT… heaven forbid that the capitalists way of life would get in the way of the intellectually challenging climate change mantra.. Fuel=The lifeblood of a modern economy… NOT simply a segment, but an ingredient that fits into all markets..