The fourth quarter of 2015 was a turbulent time for U.S. equity markets. The market volatility was caused mainly by China’s economic slowdown and the Federal Reserve’s policy-tightening. The price of oil and other commodities remained low while the U.S. dollar rose against most other currencies. These negative factors continued to affect equity markets in 2016. Global equity benchmarks are down 10% or more this year, and every industry has declined from 2015’s record high. Even though financial stocks have declined over 25% while the decreases in energy and commodities exceeded 30%, U.S. equities held better compared to other developed and emerging markets.
“Markets are off to a tumultuous start for the year, as many indices show. So far this year, markets have suffered from a more steady drumbeat of negative news about China’s demise, how-low-can-they-go commodity prices, a possible US recession, high yield credit sell-offs, spiking national deficits, and Fed policy and statements that appear incoherent to many market participants. Additional toxic ingredients have been added to the mix in February: whispers of instability among major European Financial institutions, unusual currency volatility and negative rates in some major economies, and a massive sell-off in the momentum stocks that sheltered some investors last year.” Dan Loeb Q4 2015 letter
Since its latest rebalance, the iBillionaire Index (IBLN) has performed -7.08%. Healthcare, consumer discretionary and information technology were the three lagging sectors this quarter. Financials, industrials and materials held better with a roughly flat performance. Similar to Q3, eight of the thirty stocks tracked by the IBLN Index changed. Given the increased market volatility during the quarter, the same 25% turnover rate confirms that the billionaires included in the index have a longer-term investment horizon. Going forward, healthcare, consumer discretionary and information technology remain the top three sectors represented in the index. For the first time in two years, the exposure to financials is up to 6%. The exposure to energy remains zero after many billionaires exited their positions.
The Sell-off in Financial Stocks Captures the Billionaires’ Focus
The banks’ profits are threatened by the spread of negative rates globally. As a result, financial stocks are currently going through a sell-off on both sides of the Atlantic. The billionaires seem to take notice, as they are increasing their exposure to the sector on a domestic level. Bank of America (NYSE:BAC) and American International Group (NYSE: AIG) are now represented in the IBLN index after the billionaires acquired significant stakes.
“We continue to believe that smaller and simpler is better and look forward to working collaboratively with the board and management to help catalyze a turnaround in core P&C operations, a more transparent operating structure, and the ultimate shedding of the SIFI designation. We believe that AIG stockholders will benefit from our agreement, which permits our representative to share information with our principals and consultants, subject to customary confidentiality restrictions. I hope and believe that we will work with AIG’s board to enhance value as we have done with so many other boards and companies in the past.”
Carl Icahn, February 11, 2016
Carl Icahn’s plan for AIG reminds us of his strategy at eBay. Last year, Icahn successfully pushed for an eBay-PayPal spin-off after gaining seats on eBay’s board of directors. After the spin-off, the billionaire swapped his eBay shares for a PayPal stake. Since parting ways with eBay, PayPal posted better-than-expected results and demonstrated robust growth.
Shift Away from Event-Driven Stocks and Chinese Exposure
Dan Loeb moved away from the event driven space and stocks that are tied to the troubling Chinese economy by significantly reducing his exposure to Yum! Brands (NYSE:YUM) and Kraft Heinz (NYSE:KHC). As a result of the billionaire’s exists, Kraft Heinz and Yum! Brands are no longer represented in the IBLN Index.
“We reduced our exposure to companies that were economically sensitive or tied to China or to commodity pricing while significantly increasing our short exposure.” Dan Loeb, Q4 2015 letter
Long-term Investors Consolidate Value Positions
David Tepper’s U.S. long equity exposure increased 75% and it is up to $5 billion. During the fourth quarter, Tepper almost doubled his exposure to Alphabet (NYSE:GOOG), Google’s parent company by adding 349,500 shares. Alphabet is now the billionaire’s second largest position after General Motors (NYSE:GM).The index’s exposure to technology is up to 20%. The technology stocks represented in the index going forward are Apple (NYSE:AAPL), Alphabet (NYSE:GOOG), Avago Technologies (NYSE:AVGO), Facebook (NYSE:FB), Microsoft (NYSE: MSFT), and PayPal (NYSE:PYPL).
The current market selloff makes General Motors (NYSE:GM) a good candidate for the portfolio of long-term investors such as Warren Buffett, David Tepper and David Einhorn. All three kept their GM stakes high in Q4. The stock remains Tepper’s largest equity position with a 8.5% portfolio allocation and Einhorn’s second largest position. Warren Buffett kept his position unchanged.
“Many of the investment opportunities we have identified over time have been created by the fact that the market appears to value companies based principally on short-term factors rather than long-term changes in intrinsic value.” Bill Ackman, Q4 2015 letter
The iBillionaire Index tracks the highest conviction S&P 500 stocks held by leading U.S.investment managers.The data is based on the managers’ regulatory filings with the SEC. The Index is comprised of long-only U.S. equities, it is equal weighted and rebalanced on a quarterly basis.