Goldman Sachs’ VIP List: Most Important Stocks For Hedge Funds

Thursday, March 11th, 2010

This article is a guest contribution from MarketFolly.com, an excellent blog which tracks the activities of the hedge fund industry’s finest.

Given our focus on following hedge fund movements, we thought it would be prudent to post up Goldman Sachs’ VIP list. The ‘VIP’ stands for ‘Very Important Positions‘ for hedge funds that employ fundamental strategies rather than technical or trading. In essence, these are the 50 stocks that most frequently appear among the top ten holdings of hedge funds. In our hedge fund portfolio tracking series you may have noticed various stocks popping up over and over again in their top 10 holdings. This is simply an aggregation of a larger set of data and stems from our previous coverage of the top ten hedgie holdings.

This basket of stocks returned 40% in 2009 versus 27% for the S&P 500. Goldman also notes that this list has, “outperformed the S&P 500 by 81 bp on a quarterly basis since 2001, with a Sharpe Ratio of 0.29.” Quarterly turnover on this list is typically around 15 positions out of the 50. Those of you with Bloomberg Terminal access can look it up via GSTHHVIP.

Goldman has aggregated data from 487 funds based on the recent slew of 13F filings so these were the most popular stocks owned as of December 31st, 2009. Again, they focus on fundamentally focused hedge funds but have taken a much broader view of hedge fund land than we typically have. We instead focus on a select list of funds to track that are ideal due to their strategy and portfolio concentration. What’s most interesting about the data Goldman has assembled is that many of the positions have actually been down year-to-date for 2010. We found that intriguing given that these are essentially ‘groupthink’ or consensus picks.

Below you will find Goldman Sachs’ VIP List with the name of the stock followed by the number of hedge funds that own that stock in their top ten holdings.

1. Apple (AAPL): 67 hedge funds hold it as a top ten holding
2. Pfizer (PFE): 45
3. Bank of America (BAC): 37
4. Google (GOOG): 37
5. JPMorgan Chase (JPM): 36
6. Microsoft (MSFT): 36
7. Mastercard (MA): 29
8. DirecTV (DTV): 27
9. Wells Fargo (WFC): 27
10. CVS Caremark (CVS): 24
11. Citigroup (C): 23
12. Hewlett Packard (HPQ): 23
13. Monsanto (MON): 23
14. Visa (V): 23
15. Cisco Systems (CSCO): 21
16. Walmart (WMT): 21
17. Oracle (ORCL): 18
18. Qualcomm (QCOM): 18
19. Exxon Mobil (XOM): 18
20. Ebay (EBAY): 17
21. Wellpoint (WLP): 17
22. Intel (INTC): 16
23. Mead Johnson Nutrition (MJN): 16
24. Merck (MRK): 16
25. Johnson & Johnson (JNJ): 15
26. Liberty Media (LSTZA): 15
27. Amazon (AMZN): 14
28. Apache (APA): 14
29. EMC (EMC): 14
30. Express Scripts (ESRX): 14
31. Ford Motor (F): 14
32. IBM (IBM): 14
33. Lear (LEA): 14
34. Teva Pharmaceutical (TEVA): 14
35. Yahoo (YHOO): 14
36. Crown Castle (CCI): 13
37. McDonald’s (MCD): 13
38. Transocean (RIG): 13
39. Barrick Gold (ABX): 12
40. SBA Communications (SBAC): 12
41. US Bancorp (USB): 12
42. Anadarko Petroleum (APC): 11
43. Berkshire Hathaway (BRK.B): 11
44. Philip Morris International (PM): 11
45. Transdigm Group (TDG): 11
46. Target (TGT): 11
47. Thermo Fisher Scientific (TMO): 11
48. American Tower (AMT): 10
49. Comcast (CMCSA): 10
50. Freeport McMoran (FCX): 10

Of the stocks mentioned, there are a handful that are brand new additions to Goldman’s VIP list. This means that enough hedge funds have brought their stakes in the company up to a top 10 position in their respective portfolios. Positions that hedgies added largely to in the fourth quarter include: Wells Fargo (WFC), Mead Johnson (MJN), Merck (MRK), Liberty Media (LSTZA), Amazon (AMZN), Apache (APA), IBM (IBM), Lear (LEA), Crown Castle (CCI), SBA Communications (SBAC), US Bancorp (USB), Anadarko Petroleum (APC), Target (TGT), American Tower (AMT), and Freeport McMoran (FCX).

Readers will take note that all three major tower stocks are included as we’ve been harping on this for some time now. We’ve highlighted how hedgies had increased exposure to AMT, CCI, and SBAC as demand for wireless data service continues to grow. Overall, an insightful list and now you can easily follow the smart money with these consensus plays. For more research from Goldman Sachs, head to our other post which covers an extensive look at the top hedge fund holdings. And don’t forget that you can also get specific hedgie portfolio updates by heading to our tracking series where we specifically focus on bottom-up stockpickers.

Source: Marketfolly.com, March 5, 2010

Tags: 13f Filings, Advertisement, Aggregation, Amp, Apple, Bp, Concentration, Consensus, Consensus Picks, Fund Portfolio, Goldman Sachs, Hedge Fund, Hedge Funds, Hedgie, Quarterly Basis, Sharpe Ratio, Slew, Stems, Stock, Stocks, Turnover, Vip
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David Rosenberg: “My Take on the Fed”

Friday, February 19th, 2010

WHILE YOU WERE SLEEPING

The U.S. consumer price data is hot off the press and while the headline came in below expected at +0.2% MoM (so much for the PPI being a leading indicator). The real key was the -0.14% print on the core index (which removes food and energy) - deflation in the core CPI is a 1-in-80 event and should be treated seriously in terms of what it means for bond yields and corporate pricing power in the broad retail sector (there were notable declines in recreation, clothing, new car prices, hotels and air fare).

The theme for 2010 is the return of volatility and the appropriate investment strategy is to minimize it through appropriate hedge funds strategies and portfolios that are negatively correlated to risk. Look at what we have on the worry list that we did not have 10 months and 70% ago on the S&P 500:

• China and India tightening credit policy
• The Fed embarking on an exit strategy
• The peak in fiscal stimulus behind us, not ahead of us
• Iran (see today’s WSJ editorial)
• Greece (Portugal? Spain?)
• Sovereign default risks
• China selling U.S. treasuries
• Stricter capital rules for banks

MY TAKE ON THE FED

The hike in the discount rate from 0.5% to 0.75% was only a surprise because of the timing, but the Fed had been warning for some time that this was going to be part of the process of taking the emergency stimulus out of the financial system. Ben Bernanke mentioned this at last week’s prepared text to Congress and

Wednesday’s FOMC meeting contained recommendations from the Fed staff to start raising the discount rate as soon as possible. (We see in today’s NYT that former Governor Larry Meyer quipped “don’t they [the markets] understand the meaning of soon?” Well, after looking up the word in the dictionary, “soon” was defined as “in the future”, not necessarily next week). A whole array of other emergency measures are slated to end in the course of the next month, so yesterday’s after-market-closing move in the discount rate is part and parcel of the Fed’s long-discussed exit strategy.

Before the crisis intensified in 2008, the normal spread between the discount rate and Fed funds was 100bps, and yesterday it went from 25bps to 50bps. The Fed also reduced the term on discount window loans back to overnight from 28 days - all in an effort to “normalize” policy (notwithstanding how fragile this recovery really is and how abnormal it is to still be over 8 million jobs shy of the former peak at this stage of the policy cycle).

The near-term reaction is predictable with equity futures selling off sharply but this is because Mr. Market has always held the discount rate in high esteem - likely more than it deserves (as we recall that old refrain “three hikes and a stumble”). Also keep in mind that the Fed first cut the discount rate before the market opened back on August 17, 2007, and the Dow rallied 233 points that day. It was hardly the right call and it is very likely the case that the market is over-reacting to yesterday’s hike in the opposite direction.

Not that I’m bullish on equities - from my lens, what was far more important in terms of describing the true economic backdrop was what Wal-Mart had to say yesterday in terms of its -1.7% YoY print on Q4 same-store sales (first decline in history and below the flat reading that was expected), not to mention reduced guidance for Q1. The CEO, Mike Duke, bluntly stated that “The economy remains challenged for many of our customers around the world…we expect first-quarter sales in the U.S. will be difficult.” Mr. Duke, you may run the largest retailer in the world, but the bubbleheads on television are telling you that you don’t know what you are talking about! What else does Wal-Mart represent except that 70% chunk of GDP otherwise known as the American consumer?

If the consumer is “challenged”, then how far is an inventory adjustment going to carry along this post-recession recovery. We know, we know - what about the leftover fiscal stimulus out of Washington? Our take: the drag out of the State and local government sector is going to provide a significant offset and the growing opposition to fiscal largesse from the Tea Party movement is going to put a cap on the White House intervention efforts going forward. The situation is so dire that over half of the States are reducing Medicaid services and payments to health care providers to save money (not that we have claimed sainthood, but for economists on CNBC to talk about the wonders of fiscal stimulus when the nation’s poorest people are facing budget cuts just doesn’t seem appropriate).

Yet Mr. Market was somehow able to ignore the message from Wal-Mart’s miss with the Dow rallying over 80 points. (Though yet again, on lower volume - down 6% on the NYSE!) That reaction basically makes as much sense as the dive that initially followed the discount rate increase - in a sign that this is a market that is manic and increasingly volatile.

Not only did the Fed telegraph the move, but the overall impact on bank funding costs is minimal with discount window borrowing at a mere $14.9 billion (a fraction of the pre-crisis levels of $110 billion) and the commercial banks sitting on a $1 trillion cash hoard as it is.

Moreover, the Fed kept on cutting and cutting and cutting rates all the way from August 2007 through to December 2008 and even at microscopic Japanese-like levels, this traditional mode of central bank stimulus still could not manage to put a floor under the economy, let along the markets. Only when the Fed began to treat this as a credit cycle as opposed to a liquidity cycle by rapidly expanding its balance sheet through quantitative easing measures did the turnaround in most economic indicators and investor confidence turn around.

So, it would stand to reason that the real test for the markets is going to come not from the discount rate, but by what happens when the Fed begins to shrink its balance sheet - particularly the ramifications for mortgage rates.

Bear in mind that the Fed in some sense had already been reducing its support by allowing several programs to run their course - the bond-buying program ended about four months ago too. These are all technical moves that symbolize the end to the emergency liquidity provisioning but the central bank is going out of its way to signal that these are not attempts to actually tighten monetary policy. Of course, Bernanke et al are going to have to walk a fine line and for Mr. Market, what defines “extended period” as far as the more important Fed funds rate is concerned is a key question if “before long” - the words Bernanke used to explain when the discount rate would be hiked - meant little more than a week.

All that said changes in the discount rate still can pack a psychological punch, at least in the near-term. Investors will now be reminded that the exit strategy, while gradual, is about to start in earnest. So don’t look for a lot of talk going forward of a liquidity-driven market. This could have a dampening impact on the market multiple, as has been the case in China where two moves this year to raise reserve requirements have knocked the Shanghai index down by roughly 8%. Those pundits laying claim that what the Fed is doing is great news for the stock market because it is somehow ratification of the view that we are into a sustainable growth phase should heed what has happened in China this year, and also understand that the reason the S&P 500 could muster a 70% rally off the lows of last March in advance of anything beyond ‘green shoots’ in the economy was in large part because of all this Fed- induced liquidity.

While the initial reaction to the Fed’s move may be overdone, we are still at the tip of the iceberg and the one thing Mr. Market does not like is the uncertainty when the game starts to change. I realize that the equity bull market continued well after the first set of policy tightenings in 2004, but credit growth was running rampant then and home prices were skyrocketing - a far cry from today’s landscape, especially the fact that bank lending is contracting at a record 15% annual rate at the current time. For all we know, Bernanke is about to pull a 1937-38 premature exit strategy that ultimately leads to a market and economic relapse. That may not be a base-case scenario but the odds of a policy mis-step are still greater than zero.

To be sure, it does look as though the U.S. economy has moved into an expansion phase, but like the markets, it is volatility around the downward trend. This time last year we are seeing -6.4% GDP growth and then by the fourth quarter of 2009 we are at +5.7%. What a swing. It does remind me of Japan, which has experienced no fewer than 12 quarters of 5%+ GDP growth since its bubble burst in 1990 and one-third of these occurred in the initial years after the crisis began. But there have been twice as many quarters with negative growth. Therefore, volatility is the only certainty in the economy following a credit collapse - and the markets as well.

We recall that that the Nikkei enjoyed 230,000 rally points since 1990 and the market is still down 70% from the peak at that time. It’s no different for the U.S.A. following the prior credit collapse in the 1930s - the decade saw 20 quarters of 5%+ sequential GDP growth! That’s a depression? Of course it was because there were 13 quarters of contractions mingled into those intermittent positive spasms. Real GDP did a bungee jump of 11% in 1934 and yet if memory serves me correctly, the level of economic activity was basically no higher in 1939 than it was in 1929; and because it was deflation and not inflation that predominated in that period (even with the New Deal!) nominal GDP finished the decade with a 13% loss.

It was not until the first quarter of 1941 - with the help of the war effort - that the prior 1929 Q3 peak in nominal economic activity was taken out (despite seven years of massive FDR stimulus and the odd extremely whippy positive GDP quarter). Moreover, the next secular bull market in equities did not begin until 1954 - 25 years after the prior peak. So the message here is to focus on the forest, not the trees … and to look at an inventory-led 5.7% growth rate in Q4 in the context of wiggles around what is still a fundamental downtrend.

So what does the current backdrop resemble in a modern-day sense? The summer and fall of 2007. Think about it. The S&P 500 has been jerking around on either side of 1,100 for five months now. The 10-year note yield has jumped 20 basis points from the nearby low with hardly any reason outside of negative technicals.

Go back to that period between May and October of 2007, and the S&P was just above or just below the 1,500 mark for over five months. Many didn’t know it then, and we should all be taking it into consideration now, but we were in a classic topping formation. Back then, as is the case today, the bond market was getting hit hard with the 10-year note yield surging 50bps, to 5.2%, and the universe of economists and strategists completely bearish on the Treasury market at just the wrong time. What goes around comes around.

Read the summary of today’s report here.

Read the complete report here.

Tags: 28 Days, Bond Yields, Core Cpi, Core Index, David Rosenberg, Declines, Deflation, Emergency Measures, Exit Strategy, Fed Funds, Fed Staff, Fiscal Stimulus, Fomc Meeting, Hedge Funds, Hot Off The Press, Investment Strategy, Larry Meyer, Leading Indicator, New Car Prices, Nyt, Portugal Spain, Ppi, Retail Sector, Stimulus, Treasuries, Wsj Editorial
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Hugh Hendry and Joseph Stiglitz Duke it Out Over Greece and the Euro

Wednesday, February 10th, 2010

This article is a guest contribution from The Business Insider.

Joe Stiglitz and Hugh Hendry duked it out last night on BBC’s Newsnight.

Stiglitz says that betting on a default is absurd. Hendry is betting on exactly that happening in Greece.

From Hendry’s opening line you can tell this is going to be a good fight:

“Um hello? Can I tell you about the real world?”

Then the BBC anchor asks (at 7:28): “So you would see Greece tumble and the Euro currency tumble?”

Hendry: “Absolutely.”

He goes on to say that it’s recognizing the unsustainable debt and then Stiglitz cuts him off:

“That’s absurd.”

Watch the video after the jump. Here’s a bit more transcribed:

BBC anchor (around 5:00): “But isn’t the truth, Hugh Hendry, that if Greece defaults, that you, that hedge funds like you, make millions?”

“…Some hedge funds make millions. Yeah, the hedge funds who - hedge funds, speculators, and independent central banks are what stands between an economy and hyper-inflation.

“It’s very hard to create inflation when you have free markets. When you have the discourse and dissemination of information.

“Look what happens - you get into difficulty and these guys over here [pointing at Stiglitz and Spanish Ambassador to the UK, Carles Casajuana] say, “hey we don’t like it.”

“Suddenly the truth hurts! Suddenly we want to abandon the truth. Suddenly speculation becomes a pejorative term!”

Casajuana: “No no no, we don’t want to abandon the truth. We admit we have a problem…”

Video:

Tags: Anchor, Bbc, Business Insider, Carles, Central Banks, Discourse, Dissemination Of Information, Duke, Euro Currency, Free Markets, Good Fight, Hedge Funds, Hugh Hendry, inflation, Joe Stiglitz, Joseph Stiglitz, Newsnight, Spanish Ambassador, Speculation, Speculators
Posted in Commodities, Markets | No Comments »

The Volcker Rule = Job Creation.. NOT!

Sunday, January 24th, 2010

By Dian L. Chu, Economic Forecasts & Opinions

Last Thursday, President Obama unveiled the toughest new restrictions yet on the nation’s largest banks in the aftermath of the financial crisis. The proposal is called the “Volcker Rule”, in recognition of the former Federal Reserve chairman, Paul A. Volcker, who has been pushing the proposal for months.

Under the still sketchy Volcker Rule, referred to as “Glass-Steagall in spirit,” banks that take federally insured deposits or have the right to borrow from the Fed would be required to minimize the trading they do on their own account and give up their stakes in hedge funds and private equity firms.

In other words, banks can choose to engage in proprietary trading (prop trading), or be a traditional bank, but can’t do both.

The plan has plenty of skeptics and it’s too early to know whether it will win congressional approval. But the specter of new profit-crimping regulation was enough to batter the bank stocks sending the Dow Jones Industrial Average down 213.27 points, or 2%, to 10389.88, the biggest decline since last fall.

Right Direction, But…

In recent years, banks have bulked up their profits in areas way beyond the traditional banking. The far more profitable and risky investing banking units have grown dramatically and were at the heart of the financial crisis.

While a renewed focus on financial reform by the Obama administration is certainly a welcoming sign and in the right direction, it certainly does not address the more dire issue of the Middle America – jobs.

Moreover, the timing and haste of the proposal has drawn criticism that this is simply a transparent attempt at populism, as it came two days after voters in Massachusetts sent a Republican to the Senate depriving Democrats of the 60 votes often needed to prevent a Republican filibuster in the Senate.

Missing the Point

The Massachusetts defeat of the Democrat essentially signed, sealed and delivered the one-year report card of the Obama Administration.

While the nation was suffering through the worst economy since the Depression, the Democrats wasted a year on mis-directed priorities such as overhauling health care, expanding college aid, and reducing climate change, etc., while forestalling a much needed legitimate mass job creation strategy.

Poverty Expanded to Suburbs

A new study from the Brookings Institution found that in 2008, 91.6 million people—more than 30% of the nation’s population—fell below 200% of the federal poverty level.

From 2000 to 2008, the poor population in the U.S. grew by 5.2 million, reaching nearly 40 million, up 15.4%, a pace almost twice as fast as the increase in the total population.

Suburbs in the nation’s largest metro areas saw their poor population grow by 25%. Midwestern cities and suburbs experienced by far the largest poverty rate increases over the decade. (Table 1)

Falling Wages, Rising Inflation

The latest Consumer Price Index (CPI) rose at an annual rate of 2.7% with the core rate, in which food and energy are removed from the mix, rising 1.8%.

However, what hurt consumers the most was falling wages.

According to the Bureau of Labor Statistics, while average weekly earnings were up 1.9% year-over-year in December 2009, the real wage, adjusted for inflation, showed that buying power had dropped by 1.6%, the first year-over-year decrease since 2003.

Workers are also being squeezed from the lowest average number of hours worked in a week since 1964, while the underemployment rate (U6), a better gauge of the jobless picture, remains high at 17.3% as of last December, up almost 4% year-over-year.

Job Creation, Anyone?

Infrastructure and construction related spending typically plays a large role in economic recovery. While relatively modest government investments in stimulus construction are having some positive impact on the economy, the overall construction unemployment rate is still a staggering 22.7% as of December 2009, twice the national average and at the highest level in at least a decade.

Construction economists note that stimulus-related jobs gains in the industry have been more than offset by losses in non-residential construction and public works funded by state and local governments.

This just illustrates that more comprehensive and “add-on” job creation programs need to be strategized and implemented. That is, one job creation should lead to two or three more jobs, instead of special interest programs that create one new job while leading to two or three job losses in other areas.

Rhetoric & Substance

Nevertheless, from his recent speech, President Obama appears to be still on the path of mis-guided priority when he said that a jobs bill emerging in Congress must also include tax breaks for people trying to make their homes more energy efficient.

In addition, Senator Evan Bayh said in an interview on Bloomberg Jan. 23 that he expects

“Obama to use the Jan. 27 nationally televised address before Congress to embrace creation of a commission that would suggest spending cuts and tax increases that Congress would be forced to vote on.”

It seems obvious that the Administration will continue its seriously mis-aligned policies with the truth in observable reality.  Soaring rhetoric notwithstanding, people grasp the difference between showmanship and substance.

Tags: Bank stocks, Chairman Paul, Congressional Approval, Dian, Dow Jones, Dow Jones Industrial Average, Economic Forecasts, Federal Reserve Chairman, Glass Steagall, Hedge Funds, Job Creation, Middle America, Missing The Point, Obama, Paul A Volcker, Populism, Private Equity Firms, Proprietary Trading, Report C, Transparent Attempt
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Super-Rich buying Gold, Commodities, Reducing Hedge Fund Exposure

Monday, November 16th, 2009

Steve Lodge, FT.com, reports that the super-rich are opting for gold and commodities, and cash, and reducing hedge funds exposure.

The investment preferences of the world’s wealthiest families have shifted significantly in favour of gold and other commodities and away from hedge funds in the wake of the financial crisis, according to a survey of family offices and advisers of the super-rich.

Two-thirds of the 100 respondents to a survey by the Family Office Channel, a new website, said that super-rich families are now more likely to invest in gold and other commodities. They are also more interested in bond investments and in holding higher amounts of cash as part of an “instinctive retreat to ultra-safe asset classes”.

Read the whole article here.

Tags: Advertisement, Asset Classes, Bond Investments, Buying Gold, Commodities, Favour, Financial Crisis, Gold, Gold Commodities, Gold Fund, Hedge Fund, Hedge Funds, Invest In Gold, Investment Preferences, Respondents, Rich Families, Two Thirds, Wealthiest Families
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The investment world, according to Julian Robertson

Friday, October 16th, 2009

In this three-part video interview, Julian Robertson, chairman and CEO of Tiger Management, talks with Chrystia Freeland, US managing editor of the Financial Times, about US debt, China, lessons from the tech bust, the future of hedge funds, gold stocks, taxes and regulations. Good stuff!

Part 1: On the economy and inflation

Click here or on the image below to view the video.

Part 2: On market cycles and hedge funds

Click here or on the image below to view the video.

Part 3: On gold, Norway, and taxes

Click here or on the image below to view the video.

Source: Chrystia Freeland, Financial Times (here, here and here), October 15, 2009.

Tags: Bust, Ceo, China, Economy, Emerging Markets, Financial Times, Freeland, Gold, gold stocks, Good Stuff, Hedge Funds, Image View, inflation, Investment World, Julian Robertson, Managing Editor, Market Cycles, Norway, Tiger, Tiger Management, Video Interview, Video Source
Posted in Gold, Markets | No Comments »

WealthTrack: Is “Mr Market” ahead of himself, or just catching up?

Monday, September 28th, 2009

This week on Consuelo Mack WealthTrack three investment pros discuss their winning strategies. David Winters is the founder and portfolio manager of the Wintergreen Fund that invests eclectically and globally; Whitney Tilson is a value investor who runs both mutual and hedge funds; Michael Hartnett is the chief global equity strategist for Bank of America Merrill Lynch. As always with WealthTrack this is good viewing material.

Note: The transcript of this interview is not available yet, but will be posted here as soon as it arrives.

Source: Wealthtrack, September 25, 2009.

Tags: Ahead, Bank America, Bank Of America, Consuelo Mack, David Winters, Global Equity, Hedge Funds, Investment Pros, Merrill Lynch, Michael Hartnett, Portfolio Manager, Strategist, Value Investor, Whitney Tilson, Wintergreen Fund
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The Discomfort of Diversification

Wednesday, August 26th, 2009

When Harry Markowitz, an aspiring graduate student, had his article entitled Portfolio Selection published in the Journal of Finance in 1952, he could not have foreseen that his insight into diversification would earn him the Nobel Prize. His idea was simple but profound – “it is not enough to invest in many securities…it is necessary to avoid investing in securities with high covariances among themselves.” Putting eggs in lots of different baskets isn’t enough; one has to select baskets which do not move in tandem.

Proper diversification blends asset classes and investment strategies that have low covariances meaning as some fall in value others will tend to rise. 2008 was a case in point. Although equities plummeted and corporate bonds faltered worldwide, a number of assets and investment strategies experienced positive performance as depicted in the following chart.

Government bonds, particularly longer maturities, managed futures and dedicated short hedge funds and gold all rose in response to falling interest rates, plunging stock prices, and the flight to the safe-haven of the U.S. dollar and precious metals. What these assets and strategies have in common are historically low or even negative correlations to equities; in this light, their strong diversification effect in a year of epic stock losses should be no surprise. Investors with allocations suitable to their risk profiles were undoubtedly thankful.

Six months later, the investment landscape has changed. Stock markets have soared and, as evidenced in the following chart, with the exception of gold, last year’s diversifiers are posting negligible or negative returns.

Yesterday’s heroes have become today’s losers. This experience typifies the veiled corollary of Markowitz’s insight. Proper diversification is discomforting - it entails constructing a portfolio with combinations of asset classes and strategies that will tend to fall in value when others tend to rise and vice-versa. In other words, having some portion of a portfolio invested in today’s losers is an essential element of sound investment management.

Unfortunately, investors are ill-equipped to deal with this disappointing truth. Behavioural finance experts have found that investment decision-making is characteristically marred by cognitive errors including myopia – the tendency to be short-sighted; loss aversion – the predisposition to find losses much more painful than gains; and mental accounting – the tendency to categorize and evaluate economic outcomes in isolated groupings rather than as part of the whole. The result is that many investors react emotionally to any disappointing performance and impatiently sell losers and chase winners, often at the most inopportune times. They forget that the essence of diversification demands a continual exposure to the losing asset classes of the day.

At times, diversification is not just discomforting; it is downright painful. When growth stocks soared in the late 1990’s, many investors found the lagging returns of value stocks and REIT’s intolerable. Yet, as illustrated in the following graph which compares the annualized rolling six-month returns of growth stocks (in red) to value stocks (in green) and REIT’s (in blue), those laggards rapidly became winners as the tech crash pummelled growth stocks while value stocks and REIT’s experienced, for the most part, positive returns.

Investors should know that although diversification works, it is discomforting because it inevitably entails having a portfolio allocation to losing asset classes and strategies. Winston Churchill once cleverly opined, “Democracy is the worst form of government, except for all those other forms that have been tried from time to time.” To borrow his shrewd witticism, we can say that diversification is the worst form of investing, except for all those other forms that have been tried from time to time.

Tacita Capital Inc. (”Tacita”) is a private, independent family office and investment counselling firm that specializes in providing integrated wealth advisory and portfolio management services to families of affluence. We understand the challenges of affluence and apply the leading research and best practices of top financial academics and industry practitioners in assisting our clients reach their goals.

Tacita research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it and is not intended to replace individually tailored investment advice. The asset classes/securities/instruments/strategies discussed may not be suitable for all investors and certain investors may not be eligible to purchase or participate in some or all of them. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. Tacita recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor.

Tacita research is prepared for informational purposes. Neither the information nor any opinion expressed constitutes a solicitation by Tacita for the purchase or sale of any securities or financial products. This research is not intended to provide tax, legal, or accounting advice and readers are advised to seek out qualified professionals that provide advice on these issues for their individual circumstances.

Tacita research is based on public information. Tacita makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to inform any parties when opinions, estimates or information in Tacita research changes.

All investments involve risk including loss of principal. The value of and income from investments may vary because of changes in interest rates or foreign exchange rates, securities prices or market indexes, operational or financial conditions of companies or other factors. There may be time limitations on the exercise of options or other rights in securities transactions. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. Management fees and expenses are associated with investing.

Tags: Asset Classes, Corollary, Corporate Bonds, Gold, Government Bonds, Hedge Funds, Investment Landscape, Investment Strategies, Journal Of Finance, Maturities, Negative Correlations, Nobel Prize, Portfolio Selection, precious metals, Proper Diversification, Risk Profiles, Safe Haven, Short Hedge, Stock Losses, Stock Markets, Stock Prices
Posted in Gold, Markets | No Comments »

WealthTrack’s Great Investors: A Conversation with Andrew Lo

Monday, August 24th, 2009

This week in WealthTrack’s series on Great Investors, Consuelo Mack delves into the world of hedge funds with MIT Professor and hedge fund investor Andrew Lo. A student of investor behavior, Lo explains how human psychology plays a key role in financial crises, including the most recent one.

Lo is one of the up-and-coming stars of the investment world both as a financial thought leader and investor. The late, great financial historian Peter Bernstein, among others, highly recommended him as one of the best minds in the world of finance.

Note: The transcript of this interview is not available yet, but will be posted here as soon as it arrives.

Source: WealthTrack, August 21, 2009.

Tags: August 21, Finance, Financial Crises, Fund Investor, Hedge Fund, Hedge Funds, Historian, Human Psychology, Investment World, Investor Behavior, Investors, Key Role, Mack, Mit, Peter Bernstein, Plays, Thought Leader, Wealthtrack
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Hedge Fund Insights - Manager Updates (July 30, 2009)

Friday, July 31st, 2009

This post is a guest contribution by MarketFolly.com. MarketFolly.com compiles an excellent compendium of the profiles and activities, and tracking the SEC filings of the most prominent hedge funds, shedding light on the activities of some of this era’s most successful investors.

This is the latest edition in a new series of posts we’re doing here at Market Folly entitled, ‘hedge fund news summaries.’ And, as as the title obviously states, the goal is to give you the quick hits of everything that is happening in hedge fund land. So far, reader response has been very positive and we thank you for the feedback. As such, we will continue posting them since many have found them useful. You can check out our most recent hedge fund news summary to catch up to speed as well.

Seth Klarman (Baupost Group) - The value master himself has recently been “up to no good.” And, by that, we simply mean he has been active making investments. Intriguingly enough, Klarman’s latest target has been CIT Group (CIT). Before you avid Klarman-ites become appalled and outraged at this move, settle down… this is a pretty good deal for him. (Obviously, right? Why else would he do it?) Klarman’s hedge fund Baupost Group was part of the assembly of funds that provided financing for CIT. Baupost joined Centerbridge Partners, Oaktree Capital Management, Pacific Investment Management, and Silver Point Capital, among others. The reason this deal was so enticing to Klarman and others is that the deal was heavily over-collateralized. Supposedly, the loan is backed by $30 billion worth of assets. Additionally, Klarman and the others will be receiving an enticing interest rate of Libor + 10 points with a 3% floor. Later, it was also revealed that this group of lenders also received an upfront 5% fee. So, what’s not to love about that deal? CIT was desparate for help, and they got it. We ponder if this is another situation where a prominent investor gives his ’stamp of approval’ to a company in return for a great return on capital. While we think this specific situation is more-so due to CIT’s dire situation, we’re sure they don’t mind being associated with Klarman & Baupost. In other recent Baupost news, we saw that they sold completely out of their Omnova (OMN) position. You can check out the rest of Baupost’s portfolio here.

Pav Sethi (Gladius Investment Group) - Pav formerly worked as the head of volatility arbitrage at Citadel Investment Group and will be starting his own firm Gladius. With Pav also goes Rajesh Kedia and Bertrand Divet as Citadel loses a few more team members. They will be focused on what they excelled in at Citadel: volatility.

Paul Tudor Jones (Tudor Investment Corp) - Back in 1987 a documentary was filmed on Paul Tudor Jones and his hedge fund entitled ‘Trader: The Documentary.’ This film has become scarce and almost a form of trader contraband as Jones reportedly bought almost all available copies in the 1990’s since he didn’t want the flick floating around anymore. But, as with all great information, this video wanted to be set free. As such, the film was recently leaked onto the web and we posted it up yesterday. So, if you missed it, you can watch and/or download the video here.

5:15 Capital - In our last hedge fund update we mentioned the formation of a new hedge fund by some Brevan Howard alums. Named after a song from ‘The Who’, 5:15 has recently gotten an injection of $50 million from Man Group, one of the largest hedge fund managers on the globe. As part of the setup, Man Group will take a portion of 5:15’s revenue. The Man Group sees 5:15 stepping into a nice niche in terms of hedge fund strategies, as the crisis has left the field relatively empty in their type of arbitrage.

Warren Buffett (Berkshire Hathaway) - We aren’t limiting our hedge fund updates to just hedge funds, as we’re now also covering gurus and market strategists. Obviously, Buffett falls into this category. Buffett recently filed a 13D on Moody’s (MCO) that disclosed he had sold 7,986,300 shares of the company ranging in prices from $26.59-$28.73. Despite the sales, Buffett still owns well over 40 million shares of the company. But, this filing is interesting to note because Buffett had previously championed the ratings agencies in public as solid investments. Has he had a change of heart? We’ll continue to monitor the filings to see if he sells even more. Our immediate reaction was to wonder if he had been chatting with fellow value player David Einhorn of hedge fund Greenlight Capital. Einhorn recently presented the case for shorting Moody’s at the Ira Sohn investment conference. It’s always interesting to see a difference of opinion among smart minds, so that’s why Buffett’s selling becomes all the more curious. For further interesting reading, you can view Berkshire Hathaway’s Annual Report here and investment ideas from hedge fund managers at the Ira Sohn conference here.

John Burbank (Passport Capital) - We just covered Passport’s recent investor letter and saw some interesting developments in their portfolio. Most notably, we found out that they had been playing with interest rate bets including a curve steepener. Additionally, they have started to bet on the Japanese Yield Spread via 5-year CMS caps (calls), anticipating a rise in 10-year rates. Passport also likes Healthcare stocks as they are at the highest allocation in the fund’s history. To read about the latest from Passport Capital, check out their latest investor letter update.

Jim Rogers (ex-Quantum Fund) - The market guru himself has been out and about in the media talking about his usual theses and positions. So, we don’t really have a whole lot of new information to report in this regard. We just want to point out that (yet again) Rogers is very bullish on commodities.

Fortress Investment Group - The massive $27 billion hedge fund Fortress Investment Group is on the prowl for potential investments. However, they’re not looking for market investments in the typical sense. Instead, they’re looking to acquire other hedge funds and financial firms. Daniel Mudd, Fortress’ new CEO, has said they will try to acquire money managers, banks, insurers, hedge funds, and the like. The industry in general has definitely seen a contraction as the weak fall by the wayside during the crisis. Since there have been many opportunities in the markets throughout the course of the crisis, it will be interesting to see if Fortress finds any ‘deals’ in the hedge fund landscape.

Andreas Halvorsen (Viking Global) - A few days ago we also covered Viking Global’s latest investor letter. In the letter, we found out that they had lagged the market in the 2nd quarter of 2009 due to their short positions. More interestingly though, was the fact that they added a ton of new positions over the past quarter, 68 in all. They warned that all the new additions were not a bet on rising markets, but rather a result of their fundamental, bottom-up analysis. Their top 10 long positions as of the end of June were Invesco, Mastercard, Visa, Unilever, DirecTV, Google, JPMorgan Chase, Walt Disney, Bank of America, and Qualcomm. To find out what Viking Global has been up to, check out their portfolio update.

The Fine Violins Fund - No, we are not joking. Florian Leonhard is trying to raise capital for a Fine Violins Fund. Leonhard is a well-known violin restorer from London and has so far raised 16 million euros for the fund. He hopes to raise 60 million euros in total and seeks to invest in pre-19th century violins, primarily from Italy. Leonhard is targeting a portfolio of 50 violins and he will loan the violins out at no charge to musicians. In the past, we’ve touched on other obscure investment funds, such as a fund that invests in wine, a few funds that are investing in lawsuits, and another fund that invests in guitars. The musical instrument theme seems to be picking up steam and we’ll have to see if a Trombone fund pops up next. Let us know if there are any other interesting funds out there that we might be missing out on. These types of funds are the definition of the term ‘alternative asset class’.

David Rosenberg (Gluskin Sheff & Associates) - In our last article on Rosenberg, we noted his fondness for corporate bonds and his thoughts that the stock market in general already had a bunch of good news priced in. Rosenberg has been re-iterating his call on corporate bonds, this time saying that “they are still pricing in a very bad economic and financial market scenario. Moreover, the yield spread is still wider than at any point during the 2001 or 1990 recessions of the 1998 LTCM/Russian debt default freeze-up. In fact, history suggests that the corporate default rate would have to rise well above 7% for corporate bonds to deliver negative returns with yields as high as they are at around 7.25%.” Additionally, in media appearances over the past month or so, we wanted to point out that Rosenberg indeed sees inflation as a threat. However, he says that threat is many years away. He also thinks we easily go through past unemployment levels of 10.8% and that from March to May, the stock market has essentially seen a 40% ‘dead cat bounce’.

Hugh Hendry (Eclectica Fund) - Hugh is focused on the deflation versus inflation debate lately and he notes that he has never seen such a ‘crowded trade’ with people so confident that inflation is in our future. He favors bonds over equities and he thinks that deflation is the bigger risk here. Hugh says that, “It’s almost as if we have this flood, but people are buying fire insurance.” He is actually in favor of government bonds and notes that this is due to his contrarian nature. He is not too focused on the equity markets currently but says he will ‘prod them’ around August or September to see what is really going on there. We’ve covered Hugh’s thoughts on the blog in the past and you can view his past investor letter here.

Michael Steinhardt (WisdomTree Investments, ex-Steinhardt Partners) - Hedge fund legend Michael Steinhardt sat down and talked with Bloomberg back in early June. While this is obviously not as recent as some of the other developments we’ve pointed out, we are highlighting it due to the excellent content in the interview. He talks about returns in equity markets going forward, the current stock market, the role of hedge funds, and what people should be investing in these days. We highly recommend watching the interview and you can view the video embedded below. (RSS & Email readers will need to come to the blog to view the video). In the past, we’ve also covered Michael Steinhardt’s view on treasuries, as he says they are foolish.

Thanks for checking out our updates and stay tuned for more daily coverage of hedge fund land. In the mean time, make sure to also check out our recommended reading lists and our hedge fund portfolio tracking series.

Tags: Baupost Group, Centerbridge Partners, Cit Group, Commodities, Compendium, ETF, Folly, Fund News, Hedge Funds, Investment Management, Libor, Manager Updates, News Summaries, News Summary, Oaktree Capital Management, Pacific Investment, Reader Response, Sec Filings, Seth Klarman, Silver Point, Target, Upfront
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The ascent of money

Thursday, July 16th, 2009

Niall Ferguson’s book, The Ascent of Money: A Financial History of the World, is now available in a full-length four-part documentary. Known for his intellectual firepower, Ferguson is an historian who specializes in financial and economic history and teaches at Harvard.

The Ascent of Money is well researched and especially relevant for putting the current financial crisis in historical context. As Ferguson said, “Money’s rise has never been a smooth upward ride … Financial history has repeatedly been interrupted by gut-wrenching crises, of which today’s is just the latest.”

Each of the parts lasts for about an hour, but is conveniently broken up into chapters should one only wish to view certain sections.

Part 1: From bullion to bubbles

Ferguson examines the current global financial crisis in the context of the financial history of the West. Topics in this part include: the beginnings of money lending, stocks, bonds and credit.

Part 2: Bonds of war

Ferguson documents the rise of modern finance in Europe and its expansion into the Far East, including the ascendancy of the Rothschilds and bond markets, and the decline of Europe’s landed aristocracy.

Part 3: Risky business

The roots of the insurance industry in Europe; disasters like Hurricane Katrina expose problems in risk management; the history of hedge funds.

Part 4: Planet Finance

Ferguson chronicles the spread of good - and bad - financial practices across the globe, and the consequences for all of us.

Source: PBS - Thirteen/WNET

Tags: Aristocracy, Ascendancy, Ascent, Bond Markets, Bonds Of War, Economic History, Financial History, Financial Practices, Firepower, Global Financial Crisis, Hedge Funds, Historical Context, History Of The World, Insurance Industry, Money Lending, Planet Finance, Risky Business, Rothschilds, Stocks Bonds, Target
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David Swensen Interview (May 22, 2009)

Wednesday, May 27th, 2009

David Swensen, legendary CIO of the Yale Endowment appeared in a full length interview on Consuelo Mack’s Wealthtrack on May 22. 2009. In it, he discusses among other things, his updated recommendations for individual investors. Swensen reminds us of Jeremy Grantham, a dedicated practitioner who could care less about the investment spotlight, and would most likely prefer to be left alone to do what he loves best. Investing.

Click play to watch. For a transcript of Part 1, click here.

This is an enlightening interview, as Swensen shares his candid views on investing, and what is required for investment success.

Here are Swensen’s recommendations for individual investors. Canadian investors may want to substitute for the Canada equity bias on the US stocks allocation. Substitute for Canada Bonds and Canada Real Return Bonds to reduce the currency risk.

30% US stocks
15% treasury bonds
15% TIPS
now 15% REITs
15% foreign developed equities
now 10% emerging markets

Swensen has reduced the REITs allocation by 5% and raised the Emerging Markets allocation from 5% to 10%. By the way, Swensen made these long view asset allocation adjustments at the beginning of the year, and not last week, so given that emerging markets are outperforming G7 country equity markets, his call early in the year, to individual investors, to overweight them was reliable.

Swensen remarked that diversification fails during crises - it did in 1987, 1998 and last year. He also discusses the idea that while he is religiously a bottom-up investor, crises force you to look at top-down considerations.

This is a must see interview and Swensen provides much food for thought in this meaty interview.

Tags: Active Management, Asset Allocation, Asset Classes, Canada, Canada Bonds, Canada Equity, Canadian Investors, Candid Views, capitalism, Consuelo Mack, Currency Risk, David Swensen, Diversification, Emerging Markets, Endowments, Etps, Financial Crisis, Food For Thought, Hedge Funds, Individual Investors, Investment Horizon, Investment Success, Jeremy Grantham, Length Interview, Long Periods Of Time, Real Return Bonds, Reits, Roger Nusbaum, Some Critical Remarks, Stocks Bonds, Treasuries, Treasury Bonds, Wealthtrack, Yale Endowment
Posted in Emerging Markets, Markets | No Comments »