GuruFocus is in the process of adding the SEC filings of all the investment companies into its database. The database will be provided to subscribers for them to generate their investment ideas from the holdings of other investment companies. Over the years we have received numerous requests from our subscribers to add different investment companies/funds to our List of Gurus. With this database our subscribers will have the full flexibility of selecting any investment companies in which they are interested. In the meantime, we will make sure that adding all other investment companies does not dilute the Gurus we are tracking. We are open to suggestions and comments.
Investment funds are the biggest players in the stock market now and will play an important role in the future. If you want to know how popular of these funds, just go to GuruFocus.com to check the ownership of several public companies that you are familiar with. Then you would find that most of them have investment funds as largest shareholders
The analytic team of GuruFocus.com is developing a database of portfolio data of all investment companies that are required to make SEC filings. It covers more than 4,000 portfolios over the past five years’ portfolio data. It is interesting to do some research based on these data, which will help investors generate investment ideas of their own. I plan to do a series of research on gurus’ data and will share my findings with you. The first thing that comes to my mind is how to classify the vast amount of funds. Usually people would track a fund depending on which fund it belongs to – mutual fund or hedge fund, or partition them based on their investment philosophy that disclosed to the public. I will discuss how we categorize the massive funds data without such information. I categorize the funds based on several characters, the size of fund asset, the number of positions in the portfolio and the turnover. I list the detail information at below.
The data I used in this article are the average value of the recent four quarters (2013-12-31, 2014-03-31, 2014-06-30 and 2014-09-30) for each fund.
The asset values of the funds
In my opinion, the asset size of the funds limits the selection and execution of investment strategies in the investment management. Some strategies work well for small fund, but the risk and cost would increase faster than the return when big fund copies the method. In other words, the Sharpe ratio of investment may not sustain as the asset size increases. So in this view, it would make some sense to group the funds based on the asset size of the fund. To do analysis I selected the average portfolio market value of the 3,800 portfolios over last two years and filtered some outlier data in the calculation of the frequency distribution of asset size data. Even though some funds’ asset values are over $2 trillion, like J.P. Morgan Asset Management, as the Chart 1.1 shows below, most of the funds are in between $100 million and $10 billion and over 60 percent of funds have asset values of less than $1 billion.
Chart 1.1 (Data source: GuruFocus.com)
The number of positions
The fund manager would follow either a passive or an active investment strategy. For the passive investment strategies, it usually tries to mimic the index, while the active investment strategies want to beat the index. For instance, they choose some method like long/short strategy that shorts a position and longs another position in the same asset class. SEC requires investment fund managers to report only long positions. So in theory, it would be possible to partition the funds based on the quantity of equities in the same asset class. With all other things being equal, the fund with fewer stocks would provide more useful information for the value investor about the stock picks. Besides, they care more about the ratio of the quantity of equities in the stock market held by the fund to the total available number of products in this area.
At this point, I would compare the relationship between the number of positions and the asset value. Generally speaking, for the relationship between the size of the portfolio and the equity number in the portfolio, larger fund would choose or be required to invest more various assets, limiting the weighting of each sector. Although a high level diversification usually reduces the risk, it may affect the effectiveness of this method. For many fund managers, the number of positions in their portfolio also relates to other factors, such as their investment strategies. In the Chart 2.1, even though the asset value and the quantity of positions show some degree of positive relationship, the correlation between the size of the fund and the number of asset is not strong enough.
Chart 2.1 (Data source: GuruFocus.com)
The turnover of funds
The reason we seek to study the data of funds is that we hope to get some benefit from the research for our investment. For value investors, high turnover funds would have less value to study. Considering the transaction costs, the turnover of the portfolio should be monitored with the number of positions in the portfolio. Regarding to the correlation degree between the turnover and the number of positions, I did a regression analysis that limited the number of positions to less than 300 that the portfolio size level can be more reasonably tracked by us in the practice. As the Chart 3.1 shows, the correlation between the number level of stocks and the turnover is small.
Chart 3.1 (Data source: GuruFocus.com)
However, these are only a few initial thoughts, applying these methods bring big risk to do analysis because of the asset size of the fund does not represent the investment fund’s investment capital. There are several reasons: first, we do not know the leverage of these funds uses in their investment. For instance, 4,000 portfolios include many hedge funds these funds may highly utilize the leverage to increase their total return. Second, the asset size will mislead us if different investment strategies deployed by these funds. For example, for the strategic long/short investor, we cannot get the whole picture of their investment activities because we usually have no data about the equities that they short in their investment. Third, some investment products chosen by funds would not be required to disclose to the public. And sometimes, funds would like to use financial derivatives to mimic the stock holdings instead of to physically hold these stocks.
