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The Market Vectors Steel Index (NYSEARCA:SLX) is down 32% since it peaked earlier this year, and over the long-term it is down 60% since the index peaked in mid-2008 prior to the economic meltdown in 2008/09. The sector is down amid fears of a double-dip recession, weakening pricing power due to capacity expansions, and higher input costs (especially iron ore). However, the long-term outlook for the sector continues to be bullish as global steel output that is up at 1.3 billion tons annually (from 850 million tons in 2000), is expected to rise even more fueled by economic growth in China, India and other emerging economies.

We recently covered the steel sector in two separate articles, analyzing the relative performance of the steel sector in the case of a double- dip recession (that can be accessed from our author page), and in case steel prices rebound strongly from here. We also analyzed earlier the top steel picks of legendary or guru fund managers such as Warren Buffet, George Soros, Carl Icahn, Steven Cohen and Mario Gabelli in the steel sector.

In this article, we analyze the investing activities of the world largest fund managers, managing between $100 billion and over a trillion dollars. The list includes prominent managers such as Wellington Management ($1.6 trillion in total assets under management), Vanguard Group ($1.4 trillion), Fidelity Investments ($640 billion), T Rowe Price ($330 billion), and Goldman Sachs Asset Management ($580 billion), among others.

We determined based on our analysis that mega fund managers are bearish on the steel sector, and they are significantly under-weight in the group. During the June quarter, these mega fund managers together cut a net $1.45 billion from their $53.37 billion prior quarter position in the group, selling $5.18 billion and buying $3.73 billion worth of stocks in the group. Furthermore, overall they are under-weight in the group by a factor of 0.45; that is, taken together, the 30+ mega funds have invested 1.0% of their assets in the group, significantly less than the 2.3% weighting of the group in the overall market.

The following are the major steel sector companies that these mega fund managers are most bullish about (see table):

  • Cliffs Natural Resources (NYSE:CLF): CLF is a mining and natural resources company, producing iron ore pellets, lumps and fines iron ore, and metallurgical coal products. It operates six iron ore mines in MI, MN, and eastern Canada; two iron ore mining complexes in western Australia; five metallurgical coal mines located in WV and AL; and one thermal coal mine in WV.
    Mega funds added a net $221 million to their $3.91 billion prior quarter position, and taken together mega funds hold an out-sized 45.2% of the outstanding shares, more than their 14.3% weighting in the group. The top mega fund holders are Capital World Investors ($1.01 billion), Vanguard Group Inc. ($583 million) and State Street Corp. ($448 million). Overall, 585 institutions hold 85.7% of CLF shares, with Capital World, Vanguard and State Street being the largest holders with 9.2%, 5.3% and 4.1% of the outstanding shares respectively.
  • Gerdau SA (NYSE:GGB): GGB is a Brazilian producer and seller of common and special steel rods for the construction industry, as well as in the automotive and agricultural sectors. Mega funds added a net $124 million to their $387 million prior quarter position. The top mega fund buyers were UBS Global Asset Management Americas ($69 million) and Bank of New York Mellon Corp. ($51 million). Overall, 180 institutions hold 15.5% of GGB shares, with Schroeder Investment Management Group and UBS being the largest holders with 1.6% each of the outstanding shares.
  • Companhia Siderrgica Nacional (NYSE:SID): SID is a Brazilian producer of galvanized, hot and cold rolled and tin mill steel products. Mega funds added a net $22 million to their $294 million prior quarter position. The top holders were Vanguard Group Inc. ($117 million) and JP Morgan Chase & Co. ($59 million). Overall, 180 institutions hold 10.3% of SID shares, with Lazard Asset Management being the largest holder with 3.3% of the outstanding shares.

The following are the major steel sector companies that these mega fund managers are most bearish about (see table):

  • Vale SA (NYSE:VALE): Rio De Janeiro, Brazil-based VALE is one of the world’s leading mining companies that specializes in the mining of iron ore and pellets, manganese, alloys, gold, copper, potassium, and kaolin. Mega funds cut a net $501 million from their $4.39 billion prior quarter position. The top sellers were Goldman Sachs Asset Management ($330 million), Alliance Bernstein ($230 million), JP Morgan Chase & Co. ($136 million) and Ameriprise Financial ($134 million). Overall, 507 institutions hold 14.1% of VALE shares, with Blackrock Fund Advisors being the largest holder with 1.2% of the outstanding shares.
  • Illinois Tool Works Inc. (NYSE:ITW): ITW is a manufacturer of plastic and metal fasteners and fastening tools for the construction, automotive, and appliance markets. Mega funds cut a net $309 million from their $8.73 billion prior quarter position. The top sellers were Goldman Sachs Asset Management ($52 million) and Vanguard Group Inc. ($46 million). Overall, 862 institutions hold 80.8% of ITW shares, with Northern Trust Corp. being the largest holder with 8.8% of the outstanding shares.
  • Arcelor Mittal SA (NYSE:MT): MT, one of the largest steelmakers in the world, is a Dutch manufacturer of finished and semi-finished carbon steel products used in the automotive, appliance and machinery markets. Mega funds cut a net $121 million from their $602 million prior quarter position. The top sellers were Wellington Capital Management ($29 million), Morgan Stanley ($8 million) and Northern Trust Corp. ($6 million). Overall, 178 institutions hold 2.6% of MT shares, with Deutsche Bank AG (NYSE:DB) being the largest holder with 0.5% of the outstanding shares.

The following are the major steel sector companies that these mega fund managers are neutral about (see table):

  • Tenaris SA (NYSE:TS): a Luxembourg manufacturer of seamless and welded steel tubular products for energy and industrial applications. Mega funds added a net $42 million to their $2.21 billion prior quarter position. The top mega funds holder was Capital World Investors ($1.33 billion). Overall, 214 institutions hold 31.8% of TS shares, with Aberdeen Asset Management and Capital World Investors being the largest holders with 8.8% and 6.6% of the outstanding shares respectively.
  • United States Steel Corp. (NYSE:X): X manufactures flat-rolled and tubular steel products for the automotive, container, construction and appliance markets. Mega funds cut a net $153 million from their $1.98 billion prior quarter position, but taken together mega funds hold an out-sized 55.0% of the outstanding shares, more than their 14.3% weighting in the group. The top mega fund holders are Capital Research Global Investors ($298 million), T Rowe Price ($227 million), Vanguard Group Inc. ($225 million) and State Street Corp. ($194 million). Overall, 427 institutions hold 79.8% of X shares, with Capital Research Global Investors being the largest holder with 6.9% of the outstanding shares.
  • Rio Tinto Plc (RIO): RIO is a UK based company with global interests in mining for aluminum, borax, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium, diamonds, talc and zircon. Mega funds cut a net $25 million from their $1.39 billion prior quarter position. The top mega fund holders are Fidelity Investments ($330 million), Wellington Capital Management ($307 million) and Bank of America Corp. ($189 million). Overall, 369 institutions hold 6.1% of RIO shares, with State Farm Mutual Automobile Insurance Co. being the largest holder with 0.9% of the outstanding shares.
  • AK Steel Holding Corp. (NYSE:AKS): AKS is a U.S.-based manufacturer of flat-rolled carbon, stainless and electrical steels, and tubular products for the automotive, construction and appliance industries. Mega funds cut a net $16 million from their $358 million prior quarter position, but taken together mega funds hold an out-sized 40.2% of the outstanding shares, more than their 14.3% weighting in the group. The top mega fund holders are Vanguard Group Inc. ($57 million) and State Street Corp. ($52 million). Overall, 275 institutions hold 71.3% of AKS shares, with Vanguard Group and State Street being the largest holders with 5.9% and 5.3% of the outstanding shares respectively.

Table:

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General Methodology and Background Information: The latest available institutional 13-F filings of over 30+ mega hedge fund and mutual fund managers were analyzed to determine their capital allocation among different industry groupings, and to determine their favorite picks and pans in each group. These mega fund managers number less than one percent of all funds and yet they control almost half of the U.S. equity discretionary fund assets. The argument is that mega institutional investors have the resources and the access to information, knowledge and expertise to conduct extensive due diligence in informing their investment decisions. When mega Institutional Investors invest and maybe even converge on a specific investment idea, the idea deserves consideration for further investigation. The savvy investor may then leverage this information either as a starting point to conduct his own due diligence.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion. Further, these are our ‘opinions’ and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

Source: 10 Steel Sector Picks From The World's Largest Money Managers