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.
-
Aging: The Overlooked Risk FactorSponsored Elder care is a personal and financial vulnerability many people fail to plan for.
-
AI vs the Stock Market: How Did Alphabet, Nike and Industrial Stocks Perform in June?AI is a new tool to help investors analyze data, but can it beat the stock market? Here's how a chatbot's stock picks fared in June.
-
Eight Tips From a Financial Caddie: How to Keep Your Retirement on the FairwayThink of your financial adviser as a golf caddie — giving you the advice you need to nail the retirement course, avoiding financial bunkers and bogeys.
-
Just Sold Your Business? Avoid These Five Hasty MovesIf you've exited your business, financial advice is likely to be flooding in from all quarters. But wait until the dust settles before making any big moves.
-
You Were Planning to Retire This Year: Should You Go Ahead?If the economic climate is making you doubt whether you should retire this year, these three questions will help you make up your mind.
-
Are You Owed Money Thanks to the SSFA? You Might Need to Do Something to Get ItThe Social Security Fairness Act removed restrictions on benefits for people with government pensions. If you're one of them, don't leave money on the table. Here's how you can be proactive in claiming what you're due.
-
From Wills to Wishes: An Expert Guide to Your Estate Planning PlaybookConsider supplementing your traditional legal documents with this essential road map to guide your loved ones through the emotional and logistical details that will follow your loss.
-
Your Home + Your IRA = Your Long-Term Care SolutionIf you're worried that long-term care costs will drain your retirement savings, consider a personalized retirement plan that could solve your problem.
-
I'm a Financial Planner: Retirees Should Never Do These Four Things in a RecessionRecessions are scary business, especially for retirees. They can scare even the most prepared folks into making bad moves — like these.
-
A Retirement Planner's Advice for Taking the Guesswork Out of Income PlanningOnce you've saved for retirement, you'll need your nest egg to support you for as many as 30 years. For that, you need a clear income strategy, not guesswork.
