With banking stocks in free fall, guess who picked them as one of their top investment picks for 2023?
The people running the world’s biggest pension funds and endowments, that’s who.
Oops.
But if you’ve followed Wall Street long enough, you knew that already.
Every month BofA Securities surveys top money managers around the world to find out what they’re thinking—and what they own in the vast investment accounts they manage on behalf of the suckers…er, public.
This typically involves a survey of 250 or more money managers, handling $ 700 billion or more in assets.
And every so often a snarky reporter who should go and get a real job checks to see just how these honchos’ bets are doing.
This is one of those moments.
Bank stocks were one of the eight biggest bets being made at the start of 2023 by the money management elite, as the BofA Securities survey showed in January and which we reported on at the time.
Performance so far: down 19.7%, as measured by the SPDR S&P Bank ETF KBE, +2.25%. Good going, guys.
The other hot picks for 2023 from the world’s most important money management geniuses included commodities (iShares S&P GSCI Commodity-Indexed Trust, GSG, +0.47% ) and energy stocks (Energy Select Sector SPDR ETF, XLE, +0.39% ). Both are down around 9%. They also loved healthcare stocks (Health Care Select Sector SPDR ETF, XLV, +1.39% ), which are down 7%. Overall, their eight favorite assets have lost 4.2% on average so far this year.
A standard portfolio of 60% U.S. stocks (Vanguard Total Stock Market ETF, VTI, +0.63% ) and 40% U.S. bonds (iShares Core U.S. Aggregate Bond ETF, AGG, +0.17% )? Up 2.8%. So the fund managers’ top picks have underperformed a simple, “balanced” portfolio by 7 percentage points—in Wall Street jargon, “700 basis points.”
And we’re not even out of the first quarter.
D’oh!
Meanwhile, regular readers know that among the services MarketWatch offers is the portfolio jokingly known as Pariah Capital, which consists of equal weighted bets on the assets that these honchos hate.
These are the assets that the top money managers wouldn’t touch, and which they think are going nowhere but down.
Back in January, those were U.S., U.K. and Japanese stocks, real estate trusts, and stocks in the utility, communications, consumer discretionary and technology sectors.
Yuck! Dogs…with fleas!
Their performance so far? They are up by 4.5%.
So Pariah Capital is beating a balanced portfolio by 170 basis points (i.e., 1.7 percentage points) so far, and the money managers’ favorite assets by 870 basis points.
You can’t make this stuff up.
This is nothing new, by the way. You can often make money by betting on the assets the big money hates the most.
It’s not simply as ironic or irrational as it may sound. These money managers have three key characteristics that make it tempting to bet against them.
First, they all went to the same business schools and so they all think alike, read the same analyses and rely on the same forecasts.
Second, their No. 1 goal isn’t to put the clients’ kids through college, but to put their own kids through college: As John Maynard Keynes and many others have observed over the years, money managers have a huge career incentive to stick to the herd, and would rather be wrong collectively than try to be right individually.
Third, and finally, in aggregate these guys—and their industry overall—can’t beat the market because to a real degree they are the market. They swing so much money that if they are all betting on soybean futures to rise, just their bets will drive the price of soybean futures way up—regardless of what happens to supply, or demand at your local Chinese restaurant.
Pariah Capital: 8 ETFs
Vanguard Total Stock Market VTI, +0.63% +2.6%
Franklin FTSE United Kingdom FLGB, -0.58% +4.4%
Franklin FTSE Japan FLJP, +0.36% +3.1%
Vanguard Real Estate VNQ, +2.56% —5.3%
Fidelity MSCI Utilities FUTY, +3.10% -7.8%
Fidelity MSCI Communications Services FCOM, +0.22% +13.1
Consumer Discretionary Select Sector SPDR XLY, -0.32% +10.4%
Technology Select Sector SPDR XLK, +0.26% +15.3%
Average: +4.5%
Meanwhile, the most recent survey shows that money managers just love cash (meaning Treasury bills), bonds, large-company stocks and European stocks.
They hate stocks generally, but especially U.S. stocks and especially small-caps, along with real-estate investment trusts. They are more bearish on REITs now than at any time since the fall of 2020, before the first Covid vaccines. Make of this what you will.