Author: Charles Sizemore
Covestor models: Sizemore Investment Letter and Tactical ETF
Twice per year Barron’s runs its Big Money survey in which it asks large money managers their opinion on the market in general and on specific sectors and companies in particular. I get a lot of value from studying the results. I like to see how my own thinking lines up with the Big Money – but not for the reasons you might think.
While institutional managers are often sharper than the average investor, they can be every bit as prone to herding behavior. And when I see signs that the Big Money are all on the same side of a trade — particularly when that trade looks long in the tooth — I look for opportunities to bet the other way. This is the essence of contrarian investing.
It can be lonely taking the other side of a popular trade, particularly when you’re early or, alas, just wrong. But take comfort in the words of the late Sir John Templeton: “By definition, you can’t outperform the market if you buy the market. And chances are if you buy what everyone is buying, you will do so only after it is already overpriced.” Well said, Sir John.
Alas, it appears that we humans are hardwired to think and act as a tribe, rather than as individuals. And money managers in particular are motivated to do so. Think about it. If you bet against the crowd and you’re right, you look like a rock star. But if you’re wrong, not only do you look like an idiot but you might be out of business. When your performance is based on a benchmark like the S&P 500 you have every incentive to play it safe and match the index. The risk of being wrong is simply too much for most managers to bear.
This is why truly great managers are so rare. Few are determined enough (or perhaps crazy enough) to follow the example of GMO’s Jeremy Grantham. In the late 1990s, Grantham steadfastly refused to buy tech stocks, believing them to be wildly overpriced. When the bubble finally burst, he was vindicated – but not before he lost nearly half of his assets under management due to client attrition.
Let’s take a look at how the Big Money feels about the market in Figure 1 below. All survey results are from a poll that Barron’s mailed out on September 27, after two months of gut-wrenching volatility – but before the October rally.
A little more than half of the managers surveyed were bullish on the market over the next 6-12 months. Roughly a third were neutral and only 17 percent were bearish.
I like the way this looks. The Big Money is leaning bullish, but this is hardly what I would call wide-eyed optimism. I don’t see a lot of herding here.
Now, on the same Figure, take a look at the second graph, which measures the sentiment of the Big Money’s clients. Here we see a much different story. Respondents were not given the option to choose neutral, but from the look of things I don’t know that it would have mattered. 83 percent of clients were bearish.
So, we have large money managers leaning bullish while their clients are about as bearish as I’ve ever seen. There are no guarantees in this business, but siding with the Big Money over the little guy is generally a winning strategy.
Moving on, let’s see what they have to say about other asset classes in Figure 2.
The Big Money is, shall we say, a little less than bullish on U.S. Treasuries. It’s understandable; when they were filling in their surveys in late September, the 10-year yield had just touched 1.7 percent. Still, this looks like some pretty significant herding to me. While it is mathematically impossible for Treasuries to generate high returns at their current yield, I wouldn’t be in a hurry to short them. Don’t be surprised if Treasuries hold their own in the first half of 2012.
Sentiment for most asset classes is noncommittal; we see a lot of “neutrals” across the board, though the Big Money is leaning pretty heavily bullish on Asian and Latin American equities.
I do find the sentiment towards gold somewhat interesting. A third of managers are bullish, a third are bearish, and a third are neutral. It appears that as a whole money managers don’t know what to make of the barbarous relic. I can sympathize. Though I have been a steadfast gold bear over the past year and believe gold to be wildly overvalued at current prices, in the short term I expect the price to drift higher. In the era of high correlations and “risk on / risk off,” I would expect gold to move the same direction as the stock market (see “Platinum Might be a Better Bet than Gold” for Sizemore’s views on precious metals).
I still don’t like gold as an asset class. But I wouldn’t be in a hurry to short it right now. In fact, I recently covered the gold short that I had in my Covestor Tactical ETF portfolio model. I’m just not seeing the sentiment I would normally expect to see near the top of a bubble. I believe we’ll have an opportunity to make money shorting gold—eventually. But today is not the day.
As I write this article, Europe is still grappling with the Greek debt crisis. Until there is a definitive solution to the crisis — or an outright default — I expect the market to be choppy and volatile, but with an upward bias. This is not a “buy and hold” market, but it’s not a “run for cover” market either. My advice to investors is to use the dips to add to positions in dividend-paying blue-chips — the stocks that I believe should make up the core of most investors’ portfolios.
