Large Fund Holdings Report Q1 of 2021 Explained


Every quarter hedge funds and institutional investors file a document called a form 13F. A form 13F is required to be filed by all institutional investment managers with at least $100 million in assets under management. It discloses their equity holdings and can provide some insights into what the "smart money" is doing in the market. This is a form many investors watch closely to see what the whales are doing! See the graph below for the value of their holdings dating back to 2001!

We are repeating this definition as well as the background for those who have not seen this report before. It's been awhile since we've posted on this topic as its only released quarterly but is an amazing barometer for understanding trends before they hit the broader market. Please skip the one section below if you've either already read this background previously and/or know what 13F's are.

Background (The Boring Part):

Congress created this filing requirement in 1975. Its intention was to provide the U.S. public with a view of the holdings of the nation's largest institutional investors. Lawmakers believed this would increase investor confidence in the integrity of the nation's financial markets. Firms that are considered institutional investment managers include mutual funds, hedge funds, trust companies, pension funds, insurance companies, and registered investment advisors.

Because 13F filings provide investors with a look at the holdings of Wall Street's top stock pickers, many smaller investors have sought to use the filings as a guide for their own investment strategies. Their rationale is that the nation's largest institutional investors are not only presumably the smartest, but their size also gives them the power to move markets.

How to use it:

  • So while we often look at specific funds to see what they're doing, we also sometimes like to take a step back and see what the broader industry is doing! Therefore the below picture was created, which shows all the top stocks bought/held across all 13F filers!

Key Insights:

So, what does this graph show us?

1) Hedge Fund's are buying up Twilio... A LOT! This aligns nicely with our research around Twilio as well as the theme laid out below in overall communications. Not only is "smart money" agreeing with us good, but it also means $$ flowing in. With $$ flowing in, this creates bigger overall spikes in demand which drives up the prices for assets like Twilio with a fixed supply. This hedge fund report signals to us that our overweight thesis on Twilio is holding strong.

2) Hedge Funds's are also buying up Visa and BAC. Each are very interesting for two reasons: 1) With Visa, we see this as a reopening play as people spend more as the economy starts to open back up and 2) While Crypto is talked about in the sense of replacing traditional payment systems, investment in companies like Visa argue the opposite. We'll see how it shakes out but clearly the Whales think Visa has potential. Additionally BAC is interesting because 1) With an increase in interest rates, companies like BAC stand to make more money on their loans. To us, this signals (with the overall increase in financials below) that Hedge Fund's believe a general increase is coming! With an increase in interest rates, we could see a large change in the overall response of stocks across the market! and 2) With financials being underperformed for awhile now, if BAC is being bought up, this could signal a rally coming across the sector!

  • Additionally we also can look at the aggregate holdings level analysis over time to understand how allocations to individual sectors have changed over time. For example, using the graph below we can spot several trends such as allocations to technology, communications and consumer discretionary increasing while we see allocations to energy and consumer staples decreasing.

What does this mean:

  • This trend, on the increasing side, tells us that while asset prices have increased thereby increasing their allocation to the sector, the quarter over quarter constant increases, leads us to believe the smart money thinks these sectors are still worth holding. While the allocation to technology should not be turning anyone's heads, what is noticeable is that increases to communications and consumer discretionary have occurred. While we have advocated for buying stocks that are part of the global "re-opening" play, it is confirmation that the smart money agrees to. This leads us to believe that retail stocks, (think of stocks like Delta, MGM, PVH) could still have further room to rally than previously thought. With retail holdings increasing to over 12.5%, we're monitoring to see if that allocation continues to increase. Additionally for stocks in the communications sector (think of stocks like Twilio, T-Mobile, etc.) we clearly see here that the smart money is also betting on further expansion (which we agree with). We believe strongly stocks like these will continue to rally. Especially stocks like Twilio that both play in the tech sector as well as serving as the communications infrastructure for many use cases in mobile.

  • This trend, on the decreasing side, is also noticeable to watch. With significant decreases to consumer staples (think of stocks like Colgate, PepsiCo, Kraft-Heinz, etc.) we believe the smart money is betting on these stocks to decrease/not provide relative to upside. We agree with this trend as these boring sleepy businesses have not grown in some time and while you can yield some income, there's higher risk/reward assets out there. Energy however is extremely interesting to watch. While we fully agree the shift towards cleaner energy is inevitable, we believe this change will take longer to play out than most realize. Factor in inflation, which is favorable for energy stocks, and we believe energy prices could continue to rise. When thinking about picks like TPL, PSX, MLPI, etc. we believe the stocks (while limited in upside) can provide a nice hedge to an increase in inflation/interest rates, which will lead to overall decreases for tech heavy investor portfolios.

Key Takeaway:

  • While we do need to take these reports with a grain of salt as they are backward looking rather than forward looking they are extremely helpful in seeing how institutional investors are thinking about industries we are investing in. What it confirms (to us) is that the smart money aligns with the recommendations we've been putting out - which explains out outperformance of the general market over the last two years.

  • What we recommend is using this information as a basis for some of the stocks you're considering as well as a re-emphasis on the companies we've already recommended within these sectors and individual names!

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