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Mutual Fund News

Where the really smart fund money should have been

dberman@globeandmail.com

Many small investors think of giant mutual funds as the smart money: Headed by savvy money managers with big bucks to throw around, many of these funds establish trends and spot opportunities long before anyone else.

However, Citigroup's latest quarterly snapshot of the top holdings for the 50 largest actively managed U.S. mutual funds suggests that the smart money might not be so wily after all, with top holdings that fail to inspire with either impressive gains or dazzling potential.

The funds featured in the quarterly review are certainly impressive for their size, with more than $1.3-trillion (U.S.) in combined assets. According to Citigroup strategist Tobias Levkovich, that represents about 35 per cent of total domestic equity mutual fund assets under management.

The goal of the review is to identify large-capitalization stocks that are either under-owned or over-owned within the equity mutual fund universe. So were funds jumping into hot initial public offerings, diving headlong into gold or riding Apple Inc. to record heights?

Not a chance. Their top holding - that is, a top-ten holding among 17 mutual funds in the third quarter - was Microsoft Corp., the technology behemoth that has remained absurdly profitable but has failed to ignite interest among investors with a compelling growth strategy. The shares are down 10 per cent this year, versus an 11.6 per cent gain for the S&P 500 and a 54 per cent gain for Apple.

The second most popular holding is more inspiring, but only by a little: Wells Fargo & Co. is up 12.3 per cent this year, beating the S&P 500 by a razor-thin margin. However, the stock underperformed the market in the third quarter, when the fund survey was conducted, and has lagged Citigroup Inc.'s 46 per cent gain during the year. Plus, don't forget that Wells Fargo just happens to have Warren Buffett's Berkshire Hathaway Inc. as its largest shareholder, making the smart money look like, well, copycats.

The third most popular holding is Merck & Co. Inc., which is down nearly 1 per cent this year, trailing the S&P 500 by over 12 percentage points as investors continue to fret over the pharmaceutical giant's product pipeline and the threat of generic drugs.

Meanwhile, Mr. Levkovich also identified the most under-represented stocks - or stocks that cracked relatively few top-ten lists in the third quarter, even though they have hefty market capitalizations. These include ConocoPhillips Co., Occidental Petroleum Corp. and Ford Motor Co.

All three stocks have something in common, besides being plays on an economic rebound: Their year-to-date returns have walloped the S&P 500 this year, with average gains of 36.7 per cent.

Better luck next year, smart money.

© 2007 The Globe and Mail. All rights reserved.

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