The Stocks the Pros Own Usually Beat the Market. Here’s a List of Their 10 Most Popular Bets.
Microsoft stock was held by the highest number of mutual funds in the third quarter.
Gerard Julien/AFP via Getty Images
The top 10 holdings in mutual funds and hedge funds each quarter usually have been good bets going forward. For starters, they were good bets in the third quarter.
Funds were betting mostly on technology and consumer stocks in the third quarter, according to data from Citigroup equity strategists. The most widely held stock in mutual funds in the quarter—the stock found in the highest number of funds—was Microsoft (ticker: MSFT). The most widely held hedge-fund stock was Amazon.com (AMZN).
Microsoft rose 3.4% for the quarter, underperforming the S&P 500’s gain of 8.5%, because growth tech stocks went through a correction in September as investors’ stomachs turned at historically stretched valuations. Amazon, however, rose 14%.
Strip out the tech-stock correction and the outlook might be rosier, if history is any guide. “Quarterly baskets of the 10 (plus) most owned stocks by mutual funds and hedge funds outperformed the S&P 500 six and 12 months later,” the strategists wrote.
Here were the top-10 holdings in the third quarter for actively managed mutual funds:
•Microsoft
•Amazon
• Facebook (FB)
• Alphabet (GOOGL)
• Apple (AAPL)
• UnitedHealth Group (UNH)
• Broadcom (AVGO)
• Comcast (CMCSA)
• Netflix (NFLX)
• Mastercard (MA)
Mutual funds got it mostly right in the quarter. The only FAANG stocks to underperform the S&P 500 in the quarter was Alphabet, which lost 3.3%. Meanwhile, Apple rose 26%. There are no large and widely known publicly traded funds dedicated just to FAANGs, but the NYSE FANG+ Index, which holds the FAANG group plus five other big tech names, rose 31% for the quarter. Before September, big tech continued to outperform the market as secular growth drivers overpowered the headwinds to advertising and business spending brought on by the Covid-19 pandemic. Meanwhile, a summer surge in virus cases was weighing on other sectors.
The only other name on this list to underperform the S&P 50 was United Health, which rose just 5.3% for the period.
Here were the top 10 holdings in the third quarter for hedge funds:
•Amazon
•Microsoft
•Facebook
• Alibaba (BABA)
•Alphabet
•Apple
• PayPal (PYPL)
• Procter & Gamble (PG)
• JD.Com (JD)
•Lowe`s (LOW)
Alibaba rose 36 for the third quarter, JD.Com rose 28%, PayPal rose 13%, Procter and Gamble rose 17%, and Lowe’s rose 22%.
These performances could continue.
Since 2016, the top-10 quarterly basket of mutual fund stocks outperformed the S&P 500 in the following 12 months every time except for after the second quarter of 2018, when the basket underperformed the index by 0.6 percentage point. The largest outperformance was after the third quarter of 2019, when the basket when on to a 12-month gain that was 27 percentage points better than the S&P 500’s gain.
Similar trends are true for hedge funds. The only two one-year periods of underperformance for the top 10 quarterly basket of hedge fund stocks following the release of holdings was after the third quarter of 2018 and after the third quarter of 2017. Underperformance in the year after those quarters was about 4.8 and 1.3 percentage points, respectively, relative to the S&P 500. The best outperformance was the year after the third quarter of 2019, with the basket rising 49 percentage points over the index.
The solid trends, though, don’t mean investors should blindly follow the hedge-fund playbook. Hedge funds in recent years have had a difficult time outperforming benchmarks. Importantly, there are more stocks in these funds than just the top 10. This year, HFRX Equity Hedge Index is up a bit under 4%, while the S&P 500 is up almost 10%.
The point: Following these popular stocks isn’t a bad idea.
