Growth to value rotations are followed by rebounding markets, according to Deutsche Bank; others just think sell-off will worsen
Stocks with concentrated hedge fund ownership and momentum names have underperformed over the last few months, says the latest asset-allocation report from Deutsche Bank dated Friday, March 28th. The report further noted that hedge funds and mutual funds have cut their equity exposure to neutral positioning in the last quarter. There are some concerns that the recent sell-off may be an indicator of wider correction in the equity markets. However, the report finds that similar rotations from growth to value stocks in the past have been followed by rebounds in equity markets.
Rotations have been followed by rebound in markets: Deutsche Bank
The analysts find that there have been three instances in the past where a move from growth stocks to value stocks has fueled an upswing in the equity markets. In this regard, the report mentions the periods of Nov 2010, Oct 2011 and July 2012, when such rotations were proceeded by rising markets.
Morgan Stanley’s Adam Parker also noted a similar change in equity market flows, according to the latest report from Barron’s. In his note, Parker said that there has been a hyper-rotation out of hyper-growth and into value names. He said that value stocks outperformed by 4.5% in the eight days after the Fed’s meeting on Wednesday, March 19th. Russ Koesterich, BlackRock’s global chief investment strategist, also pointed out the same finding, noting that,
“Over the past month, large-cap value stocks have gained roughly 1.25%, while large-cap growth has lost over 2%. This rotation is being driven in part by the fading of the momentum trading theme (which favored growth styles), but it is also a result of a growing discrepancy in relative valuations.”
Hedge funds unwind, cut exposure
During the month of March, the most concentrated hedge fund names fell, hurting hedge funds who have been overweight growth names versus value. The shakedown of these momentum stocks played out as hedge funds were reducing their exposure to a more neutral setting. According to Deutsche Bank, the top 50 most concentrated hedge fund stocks have slipped by 4.5% since March 7.
Some of the most concentrated hedge fund holdings in terms of percentage of equity cap are: Micron Technology, Inc. (NASDAQ:MU), Tenet Healthcare Corp (NYSE:THC), Family Dollar Stores, Inc. (NYSE:FDO), and News Corp (NASDAQ:NWSA), whereas names like Apple Inc. (NASDAQ:AAPL), General Motors, Microsoft, Google, and American International Group have the largest number of hedge fund investors.
Micron, a famous holding of David Einhorn’s Greenlight Capital and Seth Klarman’s Baupost Group, has lost 13.5% over the last 30 days. Until the end of 2013, 24% of Micron’s equity cap was held by hedge funds. Family Dollar Stores, Inc. (NYSE:FDO), a popular holding of John Paulson, Nelson Peltz’s Trian Fund and Eton Park, is down 9.5% over a month’s period. 27% of FDO’s shares are held by hedge funds. News Corp (NASDAQ:NWSA), which has 17% of its market cap in hands of hedge funds, has lost 6.7% in the last 30 days.
According to Goldman Sachs’ David Kostin, sectors that were most affected by the recent rotation are social media, internet, and biotechnology. Unsurprisingly, these industries have attracted the highest number of hedge fund investors, thus bringing them to outsized valuations. Hedge funds that have been overweight in technology sector would be looking for cover. As Zero Hedge points out, the unwind has already begun at Discovery Capital, Coatue Management and others.
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