Mega funds holding analysis - what to buy or sell?


Are mega funds bullish on the market?

We have analyzed 5 mega global long only funds 13F filing - Fidelity Management Research (FMR), T Rowe Price, Wellington, Capital World and Capital Research. Through this analysis, we want to understand the latest market trend.


The number of stock holdings of all mega funds in this analysis exercise are all rising, except FMR. Rising number of stock holdings of mega funds imply a positive market outlook, as these funds expect better growth opportunities in the market. Both T Rowe Price and Capital World number of stock holdings reached the highest since 1Q-2015. Both Capital World and Capital Research number of stock holdings have increased in 3 and 2 consecutive quarters respectively. FMR is the only fund whose number of stock holdings have been falling, perhaps implying that FMR is under portfolio consolidation process.


Mega fund portfolio management with high discipline approach

All these top funds are running its mega size portfolio with high discipline. Despite market rally in 3Q20, all these funds manage to maintain top position as a percentage of portfolio stable on quarter-on-quarter basis. All these mega funds have their top 20 positions represented 20%-30% of the total portfolio, whereas the top 30 positions accounted for 30%-40% of the total portfolio. Long-term investors should follow such a high discipline approach.

Sell FANGM, buy Tesla

These 5 mega funds have lots of common stock holdings in their top 20 positions. These 5 mega funds only hold 49 stocks within their top 20 holdings. Thus, around half of their holdings are also owned by others. Perhaps, many of their funds benchmark against various indexes. Thus, investors can follow their portfolio, or simply buy index ETFs.

Among Top 20 positions of 5 mega funds, 60 positions were reduced, whereas only 40 were added. In sum, 5 mega funds have reduced their top 20 positions after a strong market rally in 3Q20 and allocated excess capital to new positions and non Top 20 positions, thus leading to rise of total number of stocks. This is a typical strategy of long only funds. We expect positions are mostly reduced in Sep 2020, driven by portfolio rebalancing strategy. Given a strong rally in Oct and Nov, mega funds portfolio rebalancing is likely in Dec 2020.

FAANGM are common top 5 stocks of all mega funds. However, positions of FAANGM stocks are mostly reduced, but less added, except Alphabet (GOOG US). Both Microsoft (MSFT US) and Amazon (AMZN US) were reduced by all 5 funds, thus leading underperformance performance in 4Q20.

Top 5 companies with the most added positions in 3Q20 were Alphabet (GOOG US), Mastercard (MA US), Alibaba (BABA US), Comcast (CSX US) and Broadcom (AVGO US).  In Oct and Nov 20, Alphabet, Comcast and Broadcom have delivered positive returns. Separately, Tesla (TSLA US) was ranked Top 20 stocks only twice in top 5 funds and was among top 20 reduced list. Since Tesla will be added into S&P500 on 21 Dec, we expect the 5 mega funds will have to add large number of Tesla stocks for benchmarking purpose.

Key highlights of our analysis:

i) 5 mega funds 13F filing implied positive to equity market as number of stock holdings increased

ii) Long-term investors should follow top mega funds' highly disciplined portfolio  management approach to maintain Top 20 holdings to represent 30-40% of total portfolio.

iii) We expect top mega funds reduced top holdings positions in Sep 2020, driven by portfolio rebalancing strategy. Given a strong rally in Oct and Nov, mega funds portfolio rebalancing is likely in Dec 2020.

iv) As top mega funds are reducing FAANGM positions (except Alphabet), FAANM underperformed in 4Q. Alphabet, Comcast and Broadcom were among top added positions, leading to positive return in 4Q. Since Tesla will be added into S&P500, mega funds should buy lots of Tesla before 21 Dec.



Invest Bots Limited

Published on 2020/11/29 16:22:44