Smart Money, R.I.P.

I don't mean to rub salt in a wound, since I have had my share of bad investments, but I have always despised the concept of "smart money." It implies that everyone else is not smart money, but rather is "dumb money." I also maintain that a belief in this theory promotes a herd instinct among investors, which is something we desperately need less of.

So to finally put this theory in its grave, here is a list of the largest holders of Freddie Mac (FRE) and Fannie Mae (FNM):





The data is as of 3/31/2008, so there may have been some major changes since then. Also, some of the holders are index funds. The biggest losers appear to be American Capital Group, which holds large amounts of both, mostly in three of its largest funds, the Washington Mutual Fund, the Investment Company of America and the Growth Fund of America. This large ownership is somewhat mitigated by the absolute size of these funds.

If you measure by what percent of an individual mutual fund is held in both FRE and FNMA then the following will be the most hurt:

FNM
Lord Abbett Affiliated Fund - 2.2%
Fidelity VIP II Contrafund Portfolio - 1.7%
AMCAP Fund - 1.4%

FRE
John Hancock Classic Value Fund - 4.6%
Hotchkis and Wiley Large Cap Value Fund - 3.7%
Legg Mason Value Trust, Inc. - 3.6%
DWS Dreman High Return Equity Fund - 2.7%

The Legg Mason listing is in the fund run by Bill Miller, an investor who is familiar to everyone, and the DWS Dreman High Return Equity Fund is run by David Dreman, another very well regarded Value Investor.

Comments

[Larry House:]

Very good, Eric. We always see our investments at a point in time. Right now all the investors you listed don't look very smart. They could, of course, in say months or years, look better or worse. I hope I can do something "smart" over the coming months!

2008 Jul 11 11:37 AM

[MarvinMBA:]

Its obvious to me that so called smart money managers were not so smart after all. Incidently, when the financial sector started going down all sector participants eventually get taken down too. If you want to avoid many of these problems keep your money in the bank and earning less than 4 percent is better than losing a big percentage as the crash continues. We are in unchartered territory and if you want to survive stay away from bonds/stock and put your money in the mattress. I'm not kidding!!! What was once a joke could now become reality. Were in a down cycle and the "R" word which nobody is talking about is getting closer.

2008 Jul 11 11:38 AM

[MarvinMBA:]

The R word I suggested above is wrong...what I meant was the D word, DEPRESSION could be on the horizon.

2008 Jul 11 11:50 AM

[ggbbppl:]

we are in a depression. research the first depression it was J.P. Morgan . this generation, never seen a soup kitchen before, people standing in line to get some food to eat. my friend our northern brother income trust is doing fine with nice dividend. fellow you need to watch THE DAY AFTER TOMORROW and BAD MAX. i think history is repeating itself. 45 trillion of credit default swap out there. a small percent of the 45 trillion could cause a economic ---------- fill in the blank

2008 Jul 11 12:07 PM

[WalterJR:]

Great article.

2008 Jul 11 12:17 PM

[rohum:]

the largest owners of agency paper are the banks and insurance companies

2008 Jul 11 01:03 PM

[Urbane Gori...:]

Ha Ha! Very good. Needed a laugh! jegan ;-)

2008 Jul 11 01:59 PM

[Chauncey Ga...:]

A point well made Eric. We're all going down with this economic Titanic.

2008 Jul 12 10:26 AM

[notsosmart:]

well my name says it all.a bit of luck-got out by 1/3 @ dj 14,000.

2008 Jul 12 12:11 PM

[Lynn:]

Eric,
Thanks for the info. Two of the fund families I am invested in appear on your list. While watching FNMA and FRE do a swan dive, it didn't dawn on me that one of my mutual funds may be heavily invested in them.

2008 Jul 12 02:58 PM

[notsosmart:]

its good to remember that it was the smartest of the smarts that got us into this mess.some came out smelling like a rose.most did not.these smarts learned nothing from the s&l fiasco. even mccain (one of the keating fve) seemed to have forgotten.theres no leadership available for this once great country.

2008 Jul 12 04:00 PM

[secmaven:]

Throw a dart at the stock list in the Saturday WSJ. Short the stock on which the dart lands. You will make money.

2008 Jul 13 01:05 AM

[tuckfinitee:]

Smart money? The western world is being run by carny grifters, toe dancers, and spoiled rich kids.

2008 Jul 13 04:09 PM