There are numerous ways of constructing a portfolio and deciding on an equity basket. One could go with methodologies such as growth, value, momentum or quants. Due to the wide variety of equity choices that the market offers, all fund managers face the same tough decision: which individual stocks should be included in their porfolio? This decision will determine if they stand out among their peers, and most definitely entails constant research and adjustments.
Now, let’s assume for a brief second that all fund managers did their homework properly and their stock picks are worth following. Should this be true, having a look at the equities that fund managers hold in their portfolios would be like copying the smart kid’s answers in an exam. We tested this hypothesis and the results were nothing short of a good solution to a complex question.
We started with the stock picks of the top unit trust managers within the South African Equity General sector over the past five years. By looking at all the portfolios combined into one universe, and then identifying the top 10 most popular stocks held by equity funds over any given period, delivered noticable results. The results could even prove to be very useful when building your own portfolio or selecting stock picks for the future. All you need to do is to stay up to date with these popular shares - and that’s where Sharenet Analytics comes in.
Why having a look at past stock picks can benefit an investor
There are a few things that set apart the Asset Management industry, most noticably the unique strategy or focus, size of the investment teams, and of course the company’s marketing budget. So let’s focus on the first two. The big asset management companies have substantial research capacity and market data at their disposal which they utilise in making their investment decisions on behalf of their clients. By analysing these portfolios and selecting the most popular equities chosen from amongst the almost 190 equity funds available to the retail investor, we basically summarise all their research by simply having a look at where it has led them. Another reason for looking at the most popular stocks is the "movement" from the previous quarter to the current quarter. This should give you an indication as to where money is flowing due to possible sector rotation, so these stocks will benefit the most from future fund allocations.
How we approached the analysis
We divided our research by identifying the 10 most popular medium-cap [JSE Index: J201] and large-cap [JSE Index: J200] equities that were held by the South African Equity General sector funds during the past 5 years. In short, we found very interesting results and even implemented the results in a back-testing solution. We listed the most recent quarterly results below with some popular tradable shares apearing in the top 10. For the medium-cap shares like IMP, TFG and IPL featured prominantly and among the large caps SOL was the most popular share held by managers with SBK and BTI joining the exclusive top 10.
The most recent Top 10 can be seen in the tables below, where the third column indicates the relative position movement since the previous quarter.
From these identified stocks, one can also cosult our Relative Trend Analysis (RTA) tool to identify relative alternatives or substitutes for these shares. A topical "pair" our clients are looking at the moment is NED vs SBK which indicates that NED is expected to outperform SBK on a relative basis. Other good pairs to keep an eye on (that can be found in the list above) are MTN and VOD as well as OML and SLM. The idea would be to own the most popular stock pick or its close relative alternative (correlations could be used to identify them), depending on the relative outperformance as indicated by the RTA.
If you followed this strategy and held a portfolio containing only the 10 most popular stocks in each quarter over the past 5 years, an annualised portfolio return of 18.70% and 13.62% would have been achieved for a large-cap and a medium-cap portfolio, respectively. Both these porfolios outperformed an aggressive CPI +7% benchmark (12.69% 5 Yr Ann) and even the Top40 index (12.16% 5Yr Ann) during this period. The strategy clearly promises potential, but we recommend our clients do a thorough analysis before merely buying the indicated list above.
There are more opportunities than just large caps
Something to note from the identified lists of shares is to not get caught up in purely sticking to large-cap stocks. The fact that the portfolio of large caps outperformed the medium-cap portfolio, does not mean that the medium-cap stocks should be excluded from a portfolio. Our five-year Relative Trend Analysis (RTA) of the large caps vs medium caps indices, indicates that their relative price movement could correct towards its linear trend line. This means that you could expect the medium cap index to outperform the large cap index over the medium to long term, as can be seen below.
Bearing this in mind when going back to our medium-cap and large-cap portfolios, we also found that there were quite a number of quarters where the medium-cap portfolio outperformed the large-cap portfolio. A good example is the last two quarters of 2014 where the medium-cap porfolio dominated by more than 12% in each quarter - and there are many similar examples besides.
Although this information is only available after a period of interest, it should provide an indication of where research has driven the strategy of fund managers. Constructing the list of most popular stocks, given their market capitalisation, indicated that there is some consistency in the stocks that have remained favourites.
Naturally the research is very important, but the "timing" of the purchase or entry is just as important, so please consult our dealing desk or use Sharenet Analytics software to assist you in the timing. And should this type of strategy appeal to your investment philosophy, you could also consider investing in a Sharenet MANAGED SHARE PORTFOLIO - contact our sales team on 021-700-4828 for more details.
Joani van Wyk
Joani van Wyk joined the asset management team in January 2017, responsible for quantitative research of equities across all industries. Joani completed her degree in Mathematical Science in 2015, as well as an Honours degree in Financial Risk Management in 2016, both at the University of Stellenbosch. She is currently a CFA candidate.