Here Is Where the Smart Money Has Placed Its Bets on Wall Street, So Far

What equity strategies have been working this year through the end of the third quarter, and what strategies have not? A major investment wirehouse firm regularly publishes research on this, and I summarize and add my comments in this article. 

Below are two chart boxes, the top one showing the relative outperformers and the bottom one showing the relative underperformers. The reference point is the S&P 500 Index.  The time span is from January 1 through September 30 of this year.

As seen in the top chart box, the top performing strategy is the Hedge Fund VIP List. This consists of 50 stocks that appear most frequently in the top ten holdings of hedge funds overall.

Some consider this group “smart money” and, based on this analysis, the group is earning its title so far.

Strong balance sheet as a strategy is performing solidly as well, indicating that markets are seeking comfort via strongly capitalized companies as we navigate through the pandemic.

Firms reinvesting in high growth areas (accretive acquisitions, etc.) are being rewarded by the market. Lastly, highly liquid firms (correlated with strong balance sheets) and companies generating high sales growth are two additional outperforming strategies this year.

On the other side of the ledger, equity strategies that have notably lagged the S&P 500 are shown in the second chart box, above.

Low liquidity and weak balance sheet companies have lagged. In contrast to firms investing in high growth endeavors noted above, those spending a lot on mere maintenance capital expenditures and non-growth R&D have been penalized.

Interest rate sensitive stocks have trailed, not surprising as this group consists largely of banks, spread entities, real estate, etc.


Dividend growth as a strategy has underperformed. I find this somewhat interesting. Value and high current dividend yield strategies have obviously underperformed this year.

But, according to this analysis, so have strategies that focus more on dividend growth.

Finally, high hedge fund concentration is shown as a laggard. This consists of stocks with high ownership as a percentage of their respective market caps.

Since these are often smaller capitalization stocks, this comes as little surprise that this would be flagged as a major under-performer versus the S&P 500, a predominantly large-cap index.

In summary, the equity strategies that are outperforming the benchmark S&P 500 Index through the third quarter tell a good story of what the market is keen on these days: Strong liquid balance sheets, growing revenue, and accretive acquisitions are three dominant themes.

Interestingly, no valuation-centric strategies are identified as meaningful out-performers this year when looking at the full study. Conversely, weak and illiquid balance sheets, interest spread entities, and high cost structures are sharp under-performers so far.

I find this to be an insightful exercise over the course of the year. Namely, an unbiased review of what equity strategies are and are not being rewarded by the market. I’ll revisit this analysis at the end of the year to see what has changed.

Gary has more than 30 years of industry experience, which includes research analysis and portfolio management for both retail and institutional accounts. He worked as a Senior Vice President at Wells Fargo Advisors and Wells Fargo Investment Institute for approximately 14 years in total, where he was a senior portfolio manager for both equity and asset allocation portfolios. He was also involved in investment manager due diligence and selection for the firm’s multi-manager portfolio models. Prior to joining Wells Fargo, Gary held senior-level investment management positions with several registered investment advisory organizations. He has been a Chartered Financial Analyst (CFA®) charter-holder since 1989. The CFA is a professional credential earned by investment management professionals after successfully passing three years of rigorous examinations and recording several years as a practising professional within the industry. Gary received his Bachelor of Science in Engineering from Purdue University and his M.B.A. in Finance from The University of Missouri. Additionally, Gary holds his FINRA SIE, Series 7 and Series 66 securities registrations as well as his Missouri Life Accident & Health insurance license. He is a member of the CFA Society of St. Louis and the Financial Executives Networking Group. He resides in Kirkwood, MO with his wife Kathy, and they have three adult age children, Aly, Ryan and Josh.