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Active investors are overweight oligopolists
By: The Financial Times | May 7, 2019

With markets having slipped on Monday thanks to a set of tweets from a certain Donnie from Queens, it was with some curiosity that we opened UBS’s "Top 10 crowded trades" note this morning, just to see where the damage is being done across actively managed equity portfolios.

A little about the methodology before the big reveal. From UBS:

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.
The equity index in this case being the MSCI AC World Index. OK, on to the numbers.

Drum roll please:



A few thoughts. First is the clear discrepancy in active weighting between two of China's most revered businesses: Alibaba and Tencent. Both businesses could claim to occupy near-monopoly status in their respective markets of e-commerce and social media/ gaming, yet stockpickers are eschewing Tencent for Alibaba. This may be a function of Tencent's year-long grapple with regulators to get its new video games approved over concerns that Chinese citizens are choosing brain-mushing activities over productive labour. The impasse saw its share price fall 45 per cent last year from a high of HK $471.20 to HK $260 by October.

Speaking of near-monopolies, it's no surprise to see Mastercard and Visa top of the list. The card payments businesses have been riding the tailwinds of many secular trends — such as the increased digitisation of payments — and industry-specific traits, such as capital-light business models, which means they've done well in the “flight to quality” rotation over the past half-decade.

Adobe, salesforce.com and Microsoft can also be camped together, having ridden the coat-tails of investor preference for companies that earn recurring revenues. While Salesforce has always operated on a per-seat model, Adobe and Microsoft have successfully pivoted their sticky enterprise products — Adobe Suite and Office — to a subscription model over the past half-decade. For instance, in 2012, Adobe's subscription business contributed just 15 per cent of revenues. In 2018, that number was 88 per cent, or $7.9bn. Yet with valuations for this “SaaS” — software as a service — model now looking increasingly stretched, investor exuberance may not last much longer.

One final point. The only active investor bet which strikes us as explicitly macro is the Commonwealth Bank of Australia position. Much has been made about Australia and New Zealand's explosive property market — partly a function of commodity prices, as Tom has pointed out — which now seems to be heading south, thanks to a slowing China and high private debt-to-GDP levels across both nations.

While the Reserve Bank of Australia left rates untouched Tuesday morning, much to the market's surprise, keep an eye on CBA's share price for further signs of trouble in paradise.

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