Smart Money Positioned for a Recession

Includes: DIA, QQQ, SPY
by: Cam Hui, CFA

There are many ways of defining smart money. I had a recent post describing a synthetic market neutral fund using a group of smart funds as a way of generating alpha. Using the technique shown in the sidebar (titled Reverse Engineering a Manager's Macro Exposure) I imputed the macro and sector exposures of these “smart funds" and “consensus funds”, which consists of 22 US large cap blend equity mutual funds from the major fund complexes. I found the following significant differences in their bets:

  • Smart funds are more overweight large caps, which tends to be more defensive
  • Smart funds are more aggressively underweight Financials, indicating that their mangers don’t believe that the subprime fallout is over
  • Consensus funds are still overweight the Consumer Cyclicals while smart funds are market weight or underweight

In whole, this analysis points to a picture suggesting that this group of smart fund managers are orienting their portfolio to a recession or economic slowdown, while the larger consensus funds are not yet moved that way yet.

Smart funds are more overweight large capitalization stocks, which are thought to perform better in bear markets and recessions.

Smart funds obvious don't believe that the subprime fallout is over as they are aggressively underweight Financials, which is about 20% of the weight of the market. On the other hand, consensus funds are roughly market weight.

Surprisingly, consensus funds are significantly overweight Consumer Cyclicals, while smart funds are market or underweight.