In a bull market like the one we have at present, it’s unsurprising that money managers at mutual funds and hedge funds — often with starkly opposing approaches to investing clients’ cash — could find a bit of common ground on the best names to own.
Goldman Sachs found in a new analysis of 813 hedge funds with $2.9 trillion in gross equity exposure and 573 mutual funds with $3 trillion in assets under management, there are nine stocks both view bullishly right now. They include: Adobe (ADBE), Fiserv (FISV), General Motors (GM), Liberty Broadband (LBRDK), Mastercard (MA), Square (SQ), Twilio (TWLO), Visa (V) and Wells Fargo (WFC).
The stocks — mostly of the growth variety (save for Wells Fargo and General Motors) aren’t cheap from a valuation perspective, however.
Goldman notes these nine stocks trade at a stiff 63% valuation premium to the S&P 500 (^GSPC). The robust relative premiums on these mostly growth stocks likely explains why their performance has been subpar in a market that has tilted more toward value sectors for a good portion of 2021.
These nine “shared favorites” have lagged the S&P 500 by 14 percentage points this year (6% gain vs. 20% appreciation), according to Goldman’s findings.
“The strategy of owning shared favorites has a historical track record of outperformance. Since 2013, an equal-weighted list of shared favorites has generated an annualized return of 20% (vs. 16% for S&P 500) and outpaced the S&P 500 in 62% of months,” said Goldman’s chief U.S. equity strategist David Kostin.
Where there appears to be further agreement is on the outlook for stocks headed into year-end.
Mutual fund cash allocation as a percent of assets under management sits at a record low of 1.6%, compared to a historical average of 2.5%. Meanwhile, leverage — or using debt to boost returns on investment — for hedge funds remains elevated to history, Goldman’s work shows.
“The dominant feature of the landscape today in investing is that it has never been more punitive to hold cash,” PGIM CEO David Hunt said on Yahoo Finance Live. PGIM manages more than $1.5 trillion in assets.
Both mutual fund and hedge fund managers seem to agree on that take on cash.