In this market, where fundamentals long ago ceased to matter, and where positioning remains one of the few remaining sources of alpha, investors have been focusing on lists showing the most over and under-owned stocks. However, contrary to the narrative that the most heavily owned stocks outperform the most shorted, or underowned ones, and vice versa, just last month BofA calculated that for the third year in a row, "the Top 10 most overbought stocks have trailed the S&P for each of the past three years, while the Top 10 "most neglected" stocks outperformed the S&P on average by 11.6%."
This is what BofA's quant team found:
As flows from active to passive funds have accelerated, one strategy that has worked unusually well for the last several years is a simple positioning trade of selling the 10 most overweight stocks and buying the 10 most underweight stocks by active managers. This single trade has yielded over 16ppt of alpha year-to-date. And implied derisking/ outflows on Brexit alone have been fierce, with the same strategy generating 5.2ppt of alpha just since last Thursday’s close. Even if Brexit’s impact on funds is limited from here, we believe that crowded stocks will likely continue to underperform neglected stocks: a whopping two-thirds of US large cap AUM still resides in active funds - there is likely a lot more to go in the rotation from active to passive.
As such, a useful trading framework, would be to look at the Top 10 most crowded trades of active managers - on either side of the ledger - and to short the 10 most overweight, while going long the 10 most underweight stocks.
Conveniently earlier today, UBS updated its list of the Top 10 most crowded trades, revealing "where are the largest active positions."
As UBS' Shanle Wu says, we highlight the stocks that are most overweight and underweight by global active fund managers across different regions and countries, including global (Figure 1), major developed markets such as US, Europe, Japan and Australia (Figure 2), global emerging market (Figure 3), and Asia ex-Japan region and the ten major markets in the region (Figure 4).
How does UBS measure the most active positions?
Using the institutional ownership data provided by FactSet, we form an active trading portfolio by aggregating positions across global active managers. Essentially, we sum up all the holdings in dollar value across all the active managers and calculate the weights of stocks in this active trading portfolio. We then compare this weight with the relevant equity index benchmark to form the active weight.
So, without further ado, here are the Top 10 most over and underweight stocks globally...
... broken down by major developed markets:
... by emerging markets:
... and finally Asia