Which Stocks are the Top US Fund Managers Buying?

In volatile markets, professional investors look for high quality names that are trading cheap. We reveal where the top US fund managers are finding long-term value

Greggory Warren, CFA 18 February, 2016 | 3:25PM
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It's hard to believe that it has been nearly seven years since we relaunched the Ultimate Stock-Pickers concept in April 2009. For those who may not recall, our primary goal when we revamped the concept was to tap into the transaction activity of some of the best mutual fund and insurance company investors we follow, and by cross-checking the most current valuation work and opinions of Morningstar's cadre of stock analysts against the actions of these Ultimate Stock-Pickers attempt to highlight investable ideas.

While we've never lacked for buy and sell data from our top managers, it has always proven to be a bit more difficult to find good ideas selling at reasonable valuations that we could comment on quarter after quarter. That said, with more than 75% of our Ultimate Stock-Pickers having reported their holdings for the fourth quarter of 2015, we have got a pretty good sense of what stocks they had been buying prior to the global market selloff, with many of these names now selling at much more attractive valuations. It should be noted, though, that when looking at our Ultimate Stock-Pickers’ purchases, we tend to focus on both high-conviction purchases and new-money buys.

What is a High Conviction Purchase?

We think of high-conviction purchases as instances where managers have made meaningful additions to their existing holdings, or made significant new-money purchases, focusing on the impact that these transactions have on their overall portfolios. We do, however, recognise that the decision to purchase any of the securities we are highlighting could have been made as early as the start of October of last year, with the prices paid by our top managers much different from today's trading levels.

As such, it is important for investors to assess the current attractiveness of any security mentioned here by checking it against some of the key valuation metrics, like the Morningstar Rating for Stocks and the price/fair value estimate ratio, that are generated regularly by our stock analysts' research efforts.

Our early read on the buying activity during the fourth quarter, and first part of the first quarter of 2016, has once again revealed a far smaller number of situations where our top managers have been buying individual stocks with conviction, or putting money to work in new names, than we've seen in past periods. This now marks the tenth straight calendar quarter where our top managers have generated incredibly low levels of buying activity.

What Were the Top Managers Buying?

Of the conviction buying that did take place, most of it was focused on high quality names with defendable economic moats – exemplified by the number of wide and narrow-moat names in the top 10 list of high-conviction purchases, as well as when the list is expanded out to the top 25 purchases.

With regards to the list of top 10 high-conviction purchases, a continuation of the trend of lower levels of portfolio turnover amongst our top managers once again led to fewer overlapping conviction purchases. The fourth quarter of 2015 actually matched the second quarter of 2015 for the lowest level of conviction buying activity during the last tend calendar quarters, with the number of stocks being purchased with conviction by two of our Ultimate Stock-Pickers dropping down to three names, with the remainder being generated by single managers.

Even so, four of the top 10 high-conviction purchases; non-rated Ally Financial (ALLY) and wide-moat rated Microsoft (MSFT), VF Corp (VFC), and Stryker (SYK), made during the most recent period were also new-money buys for our top managers.

Ultimate stock pickers feb 2016 buys

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Ally Financial Inc42.28 USD0.83Rating
Microsoft Corp444.85 USD0.43Rating
Stryker Corp341.73 USD-0.19Rating

About Author

Greggory Warren, CFA  Greggory Warren, CFA, is a senior stock analyst with Morningstar.

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