SAN FRANCISCO – If investors shift their attention to large-capitalization U.S. companies, as many strategists expect, then stocks that the biggest mutual funds have ignored could get a boost.
To unearth large-company stocks that could attract mutual-fund buying, Citigroup Inc. strategist Tobias Levkovich studied the 10 biggest holdings for the 50 largest actively managed funds. But it wasn't what those big funds owned that interested Levkovich, it was what they didn't own.
"Mutual fund holdings offer an insightful view of long-only investor sentiment," Levkovich told clients. "Possibly the most valuable exercise within our top-holdings study is to look for large-cap companies that seem to have limited exposure to mutual funds' top holdings lists."
Funds' top-10 lists reflect enthusiasm for mainstays such as General Electric Co. (GE) , Citigroup Inc. (C) , Microsoft Corp. (MSFT) , Bank of America Corp. (BAC) and Exxon Mobil Corp. (XOM) . Levkovich's report used data through March 31.
Contrarian-minded investors would then want to focus on shares of well-known companies that are unrepresented in the biggest funds' top holdings. These underowned stocks will likely show up on fund managers' radar in large-caps' resurgence, and that could spark additional buying interest.
Lightly owned large-caps noted in Levkovich's report include financial-services giants Wells Fargo Co. (WFC) , Morgan Stanley (MS) and American Express Co. (AXP) ; telecommunications leaders Qualcomm Inc. (QCOM) and Motorola Inc. (MOT) , beverage giant PepsiCo Inc. (PEP) , and from the health-care sector, medical device maker Medtronic Inc. (MDT) and biotechnology leader Amgen Inc. (AMGN) .
Other companies with substantial market values that are also mostly absent from the biggest funds' top-10 lists include Coca-Cola Co. (KO) , United Parcel Service Inc. (UPS) , 3M Co. (MMM) and Intel Corp. (INTC).
Funds that own the lightly owned
An alternative strategy would be investing in large-cap growth funds with significant stakes in these sparsely represented companies.
"It's always a valuable exercise to look for undervalued stocks that have been out of favor for a while; the funds that own them may be due for a rebound," said Russel Kinnel, director of fund research at investment researcher Morningstar Inc.
At Marsico Focus Fund (MFOCX) , for example, veteran manager Tom Marsico owns shares of Qualcomm, Motorola and Medtronic. The core strategy at T. Rowe Price Growth Stock Fund (PRGFX) supports key investments in American Express, Amgen and Medtronic. At Legg Mason Partners Large Cap Growth (SBLGX) , manager Alan Blake has concentrated in Amgen, Motorola, Morgan Stanley and Qualcomm.
And the new managers of Clipper Fund (CFIMX) , Christopher Davis and Kenneth Feinberg, have a large commitment to American Express. Davis and Feinberg have a reputation for investing in financial services companies; their Davis NY Venture (NYVTX) and Selected American Shares (SLASX) funds also have big positions in American Express and Wells Fargo.
Meanwhile, Coca-Cola, Pepsi, Medtronic and Wells Fargo are all top holdings of Jensen Portfolio (JENSX) ; 3M is the largest position in Mairs & Power Growth Fund (MPGFX) , which also has big stakes in Medtronic and Wells Fargo.
At Dreyfus Appreciation Fund (DGAGX) , manager Fayez Sarofim holds Intel, Coca-Cola and Pepsi, while another longtime growth-stock investor, Hersh Cohen, co-manager with Scott Glasser of Legg Mason Partners Appreciation (SHAPX) , owns shares of United Parcel Service, Pepsi, Wells Fargo and 3M.
"These are people who are looking beyond the short term," Kinnel added. "There's a consistency and a willingness to stick with what works." Accordingly, these true-believing managers tend to be infrequent traders with fairly concentrated portfolios. So, more than in most instances, shareholders will have to be comfortable with a manager's capabilities and convictions.
"These really large-cap stocks have been out of favor for a long time, but that's always been their bread and butter and they're not going to go away from it just because small caps have outperformed."
Source: Morningstar Inc. (Return as of 5/5/06)
* As of 3/31/06
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