Big institutional money managers tend to be the conventional sort, though I’m not talking about their blue power suits or country club memberships. I’m talking about their stock holdings. Managers tend to pile into the same set of large, mega-cap stocks because deviating from the crowd comes with major career risk.
Let me explain. Running a mutual fund is a fantastic, high-paying job, but it is also a precarious one. The fund’s success — and thus the manager’s paycheck — is directly tied to its assets under management. This creates tremendous pressure to conform to a benchmark, which is often the S&P 500.
A manager’s thinking goes like this: If I bet big and beat the benchmark by going outside the mainstream, my investors are happy…for a day or two. But if I bet big and lose, I might be out of a job.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
So, the result is that most managers become closet indexers who overweight a handful of stocks and hope to beat the market by a percent or two.
Imagine how surprised I was when I saw this chart in the Financial Times, which tracks institutional ownership of nine major tech companies. (Google makes the list twice, so it’s ten stocks but just nine companies.)
The large overweightings in Expedia (EXPE) and Trip Advisor (TRIP) aren’t that surprising. Expedia and Trip Advisor account for just 0.059% and 0.054% of the S&P 500, respectively, so even a small amount of institutional buying will put these stocks out of proportion to the rest. And the overweighting of Netflix (NFLX) is also pretty understandable given that it is one of the best performing stocks in the S&P 500 this year. It’s near the tail end of the chart that the numbers get interesting.
Two of the biggest names in tech — Facebook (FB) and Google (GOOGL) — are massively underowned by institutional investors relative to what their weightings in the S&P 500. And where it gets even stranger, institutional ownership of the less favorable of Google’s two traded share classes — the non-voting Class C shares (GOOG) — is “where it should be” relative to its weighting in the S&P 500. It’s the A shares (GOOGL), which actually have voting rights, that are underowned.
What’s going on here? Why are big money investors shunning Facebook and Google? Let’s look at Google first. There are two issues: The discrepancy between the share classes and the overall underweighting of Google stock by institutional investors. The latter is the easier of the two to explain. Managers don’t care about the lack of voting rights because they know their votes hardly matter. For would-be activists or corporate raiders, Google is an unassailable company. Its founders hold non-traded “super voting” class B shares that make any sort of proxy battle a virtual impossibility. GOOG’s consistent discount to GOOGL, which has actually widened recently, really makes no sense in this context, so it’s perfectly logical for an institutional manager to overweight the cheaper GOOG relative to GOOGL.
As for the issue of Google being underweighted overall… well, it might come back to that point I made about Google being unassailable. Google is not known for being particularly friendly to its shareholders (see my blog post Hey Google, Stop Being Such a Baby and Pay a Dividend.) Google is a profitable company that mints money, yet it has developed a reputation for being the plaything of its founders rather than a profit-maximizing business.
The same goes for Facebook. Zuckerberg is a ruthless competitor and one of the few people that seems to know how to actually make money in social media. Yet, Facebook has also burned through shareholder money on expensive acquisitions of dubious economic value (Oculus, Whatsapp, etc.) and expenses grew at twice the rate of revenues last quarter. Is there a trade here?
Maybe. While I don’t see an immediate catalyst to change big money minds (neither Google nor Facebook will be paying a dividend anytime soon… sigh…), you could view the underownership as a contrarian value signal.
The safest move, however, might be a pair trade. Short GOOGL and go long GOOG, and eke out an arbitrage profit as the discount closes.
Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.
-
Trump's Immigration Policies and the Price of Home Healthcare: First 100 DaysPresident Trump's immigration policies may wallop your pocketbook if you rely on a home healthcare aide.
-
Stock Market Today: Stocks Extend a Quiet Winning StreakThe S&P 500 Index could actually close April with a monthly gain, which would be an extraordinary sign of market resilience.
-
Don't Veer Off Course at the First Sign of a Squall in the MarketsWhen markets go nuts and investor sentiment drops, you can keep your sanity by trusting in and sticking with your long-term plan.
-
How Business Owners Can Prepare for a Terminal DiagnosisThe most important thing is readiness, whether the owner faces a life-changing diagnosis or an employee does.
-
Advisers, Take Note: How 2025 Social Security Changes May Impact Your ClientsWhat financial advisers might need to know to help their clients navigate Social Security in 2025.
-
Social Security Is Taxable, But There Are WorkaroundsIf you're strategic about your retirement account withdrawals, you can potentially minimize the taxes you'll pay on your Social Security benefits.
-
Serious Medical Diagnosis? Four Financial Steps to TakeA serious medical diagnosis calls for updates of your financial, health care and estate plans as well as open conversations with those who'll fulfill your wishes.
-
To Stay on Track for Retirement, Consider Doing ThisWriting down your retirement and income plan in an investment policy statement can help you resist letting a bear market upend your retirement.
-
How to Make Changing Interest Rates Work for Your RetirementHigher (or lower) rates can be painful in some ways and helpful in others. The key is being prepared to take advantage of the situation.
-
Within Five Years of Retirement? Five Things to Do NowIf you're retiring in the next five years, your to-do list should contain some financial planning and, according to current retirees, a few life goals, too.
