Where is the smart money going?

On 1st August 2024, the Bank of England (BoE) cut its base rate from a 16 year high of 5.25% down to 5%. It also officially signalled that the BoE has moved from the pause phase of its interest rate cycle and into a new rate cutting phase.

In 2023 I carried out an extensive piece of research, titled "Investing throughout the interest rate cycle" to determine the winners and losers, in terms of assets and sectors, through each phase of the interest rate cycle. The three phases analysed were:

• the base rate rise phase
• the pause phase following rate rises (which we've just left)
• the aggressive interest rate cutting phase

Of course you have to bear in mind that there was limited historical data to analyse, particularly for the pause phase which we have just left, but the research provided some useful insights. It is therefore interesting to look back at the last 12 months to see how individual sectors/assets performed. The table below shows the performance of each unit trust sector during the interest rate pause phase over the course of the last 12 months. I have also colour coded the chart for ease of use, with dark red signalling the top performing sector while dark blue indicates the worst performing sector.

Interestingly, the financial sector was among the top performing sectors, which is in line with what last year’s research piece suggested might happen. In addition, the European excluding UK sector, the UK equity income sector, the European Smaller Companies sector and the UK All companies sector were also among the top performers as predicted.

However, in a globally connected world the BoE base rate's influence was easily overpowered by wider global macro trends, which led some sectors to perform at complete odds to how history suggested they should, For example, the top performing sector over the last 12 months has been the Technology & Technology Innovation sector, driven by the rise of AI stocks. Meanwhile Commodities funds struggled after supply/demand constraints relating to the war in Ukraine eased, while at the same time concerns over Chinese economic growth resulted in lower than expected demand for commodities. Chinese economic growth fears also caused Chinese equities to underperform every other sector over the period.

But assuming that the findings from the “Investing throughout the interest rate cycle” research still ring true, as we move into the next phase of the interest cycle (i.e. rate cuts), then it would suggest that:

• Bonds could perform better relatively due to a flight to safety and currency boosts from a falling pound.
• Asian Equities (Japanese) should fare relatively well.
• Technology Stocks could be among the best performers due to their sensitivity to interest rate changes.

History also suggests that if we do eventually see aggressive rate cuts then this is likely to be in response to a crisis (in the past this has taken the form of the dotcom bubble, the financial crisis, the pandemic etc), leading to poor equity performance overall. Also cash will likely gain prominence as fund managers lock into higher rates before interest rates crash.

While there is nothing to suggest that we are about to enter an aggressive rate cutting cycle, we are already seeing interest rates being cut on savings accounts and this trend is likely to continue. So, as an aside, if you have cash on deposit then it would be prudent to shop around and secure the best interest rates while they are still available.

However, as I have mentioned earlier, current (and future) macro trends will have a significant say in which sectors/assets are going to be the winners and losers as we move into the next interest rate cycle in the UK and beyond. Don’t forget, the US Federal Reserve has the largest influence on global investment markets and has yet to start cutting interest rates.

So what is the smart money doing?

While we can’t predict the future, and the lessons of history can't provide any guarantees, I thought it would be interesting to look at what the so-called ‘smart money’ is doing. Or in other words, how are professional fund managers positioning their portfolios for the future and where are they allocating their money in the UK, the US and Europe?

After analysing the portfolios of all the UK All Companies funds, North American equity funds and European ex UK equity funds I was able to determine which stocks managers are moving their money into en masse and those stocks that they are moving the most money out of.

As a DIY investor this is useful information in itself if you want to inform your own views on individual stocks. But from a wider perspective it is possible to see if there is a pattern as to the types of sectors professional fund managers are moving in and out of. As we move through the interest rate cycle fund managers will usually look to adapt their portfolio's and that will mean favouring certain equity sectors. In addition, the most/least popular sectors will indicate whether there are other trends that are dominating fund managers’ investment decisions. A good example, of course, is the ongoing obsession with AI stocks.

Below I list the top 20 stocks attracting the most money over the last 3 months, as well as the 20 stocks haemorrhaging the most money from professional fund managers from the UK All Companies sector, the North American sector and the European ex UK equity sector. Beneath each I then summarise what insights can be gleaned from the list, if any. Bear in mind that there will be conflicting signals and possibly false signals in the data but the overall trends do provide some interesting insights.

North American equity fund managers

Top 20 most sold stocks

• AES Corporation (AES): Utilities​
• Procter & Gamble Company (PG): Consumer Staples​
• Visa Inc. (V): Financial Services
• Amphenol Corporation (APH): Technology
• Qualcomm Incorporated (QCOM): Technology
• Stericycle Inc. (SRCL): Industrials
• Danaher Corporation (DHR): Healthcare
• Chevron Corp (CVX): Energy
• Cameco Corp (CCJ): Energy
• JPMorgan Chase & Co (JPM): Financial Services
• Automatic Data Processing Inc (ADP): Technology
• Banco Comafi Sociedad Anonima: Financial Services
• Graphic Packaging Holding Co (GPK): Materials
• NXP Semiconductors N.V. (NXPI): Technology
• Cboe Global Markets Inc (CBOE): Financial Services
• ASML Holding N.V. (ASML): Technology
• Mastercard Incorporated (MA): Financial Services
• Celsius Holdings Inc (CELH): Consumer Staples
• Live Nation Entertainment, Inc. (LYV): Technology
• Builders FirstSource, Inc. (BLDR): Industrials

Top 20 most bought stocks

• Apple Inc. (AAPL): Technology
• Meta Platforms, Inc. (META): Technology
• Caterpillar Inc. (CAT): Industrials
• Corning Incorporated (GLW): Technology
• Micron Technology, Inc. (MU): Technology
• NVIDIA Corp (NVDA): Technology
• Rentokil Initial PLC (RTO): Industrials
• UnitedHealth Group Incorporated (UNH): Healthcare
• Autodesk Inc (ADSK): Technology
• Tesla, Inc. (TSLA): Consumer Discretionary
• AbbVie Inc. (ABBV): Healthcare
• Oracle Corporation (ORCL): Technology
• Climb Global Solutions, Inc. (CLMB): Technology
• Rollins, Inc. (ROL): Industrials
• Illumina, Inc. (ILMN): Healthcare
• Walmart Inc. (WMT): Consumer Staples
• iShares Russell Mid Cap ETF (IWR): Financials
• Adobe Inc. (ADBE): Technology
• Amgen Inc. (AMGN): Healthcare
• Haemonetics Corp (HAE): Healthcare

The general trend is for US equity managers to move out of Energy, Financial Services, Consumer Staples, Industrials and into Healthcare, Technology stocks and Consumer Discretionary stocks.

To keep things simple I've labelled stocks from the Communication Services and Information Technology sectors as simply Technology. Interestingly some technology stocks appear in the most sold list alongside the iShares Russell Mid Cap ETF which is perhaps a reflection of concerns over high valuations, which has sparked the rotation into undervalued smaller companies stocks which had lagged the wider market over the last year. The fact that 5 of the top 6 most bought stocks are technology stocks, including Nvidia, shows that confidence in the AI theme remains.

With fund managers moving money into technology, healthcare, and consumer discretionary sectors it perhaps reflects confidence in future US economic growth, bolstered by potential interest rate cuts. However, there are signs that managers are also hedging against a potential economic downturn with investments in healthcare and consumer staples.

Also, the sale of Energy stocks and Financial services, both strong performers during the interest rate rise and the pause phase of the interest rate cycle suggests that North American equity fund managers are betting that inflation in the US has been tamed and we will shortly be moving into a rate cutting environment, in which both tend to underperform.

UK equity fund managers

Top 20 most sold stocks

• Diageo PLC: Consumer Staples
• Ashtead Group: Industrials
• GSK PLC: Healthcare
• Legal & General Group: Financial Services
• CRH PLC: Materials
• Jet2 PLC: Consumer Discretionary
• Pearson PLC: Communication Services
• Spectris: Technology
• FirstGroup PLC: Industrials
• Phoenix Group Holdings: Financial Services
• Melrose Industries PLC: Industrials
• Compass Group: Consumer Discretionary
• Next: Consumer Discretionary
• British American Tobacco: Consumer Staples
• Glencore PLC: Materials
• Sage Group: Technology
• Renishaw PLC: Technology
• 4imprint Group PLC: Communication Services
• Next 15 Group PLC: Communication Services
• Senior PLC: Industrials

Top 20 most bought stocks

• Unilever PLC: Consumer Staples​
• AstraZeneca PLC: Healthcare
• HSBC Holdings PLC: Financial Services
• Barclays PLC: Financial Services
• Imperial Brands PLC: Consumer Staples
• ITV PLC: Communication Services
• Prudential PLC: Financial Services
• Rio Tinto: Materials
• Games Workshop Group: Consumer Discretionary
• 3i Group PLC: Financial Services
• London Stock Exchange Group PLC: Financial Services
• RELX NV: Communication Services
• Tesco: Consumer Staples
• Britvic PLC: Consumer Staples
• Hargreaves Lansdown PLC: Financial Services
• Experian PLC: Industrials
• Shell PLC: Energy
• Standard Chartered PLC: Financial Services
• National Grid: Utilities

Unlike US equity fund managers, where there is cautious optimism, there is a less discernible pattern when it comes to UK equity trades. Because the larger cap section of the UK stock market has less exposure to technology stocks, compared to the US where technology inflows are a major theme for investors, the AI theme is not evident in the UK. Also there seems to be less certainty over the future direction of interest rates and inflation. Energy stocks as well as consumer staples and financials make the most bought list. The lack of conviction perhaps reflects a wait-and-see approach to not only inflation data and UK monetary policy but also the fiscal plans of the new Labour government.

European equity fund managers

Top 20 most sold stocks

• LVMH Moet Hennessy Louis Vuitton SE: Consumer Discretionary, France
• L'Oréal: Consumer Staples, France
• AXA: Financial Services, France
• Allianz SE: Financial Services, Germany
• Partners Group Holding: Financial Services, Switzerland
• Hermes International: Consumer Discretionary, France
• LVMH Moet Hennessy Louis Vuitton SE: Consumer Discretionary, France
• Airbus SE: Industrials, Netherlands
• BNP Paribas: Financial Services, France
• Intesa Sanpaolo SPA: Financial Services, Italy
• Safran: Industrials, France
• Nestle S.A.: Consumer Staples, Switzerland
• EssilorLuxottica: Healthcare, France
• Wienerberger AG: Materials, Austria
• Linde AG: Materials, Germany
• Carlsberg: Consumer Staples, Denmark
• D'Ieteren Group: Consumer Discretionary, Belgium
• Saab AB: Industrials, Sweden
• UniCredit SPA: Financial Services, Italy
• Orange: Communication Services, France

Top most bought stocks

• Infineon Technologies AG: Technology, Germany
• Roche Holding AG: Healthcare, Switzerland
• Schneider Electric SE: Industrials, France
• Henkel AG & Co. KGaA: Consumer Staples, Germany
• ASM International NV: Technology, Netherlands
• Nestle S.A.: Consumer Staples, Switzerland
• Adidas AG: Consumer Discretionary, Germany
• Sanofi: Healthcare, France
• SAP SE: Technology, Germany
• MTU Aero Engines AG: Industrials, Germany
• Deutsche Boerse AG: Financial Services, Germany
• Novartis AG: Healthcare, Switzerland
• Anheuser-Busch InBev: Consumer Staples, Belgium
• Novo Nordisk A/S: Healthcare, Denmark
• ABB Ltd: Industrials, Switzerland
• TotalEnergies SE: Energy, France
• Koninklijke Philips N.V.: Healthcare, Netherlands

European equities provide a great example of how other themes are driving fund manager decisions. On each list I have included the geographical location of each stock and you will notice that the political uncertainty in France, and the associated stock market volatility, saw fund managers sell French stocks en masse.

This is also one of the reasons we saw reduced positions in major financial institutions like AXA, Allianz, BNP Paribas and Intesa Sanpaolo suggesting a reevaluation of the financial sector, potentially due to concerns about economic stability, regulatory changes and further interest rate cuts by the European Central Bank.

The selling of luxury goods companies like LVMH and Hermes indicates a cautious approach towards high-end consumer spending, with a focus shifting towards more defensive sectors such as healthcare and consumer staples.

Overall, and despite the fact that the European Central Bank has already begun cutting interest rates, the mood among European fund managers is one of economic uncertainty and caution.