[NEW YORK] Hedge funds have long had a fancy for shares of consumer-discretionary companies, even though the love went unrequited in 2014 as the group trailed the return of the broader market for the first time in seven years.
This year, however, the tide has shifted back in their favor. The group of retailers, restaurant chains and other companies that want a piece of your spare cash is up about 6 per cent for the year, more than double the gain in the Standard & Poor's 500 Index. You can probably thank cheap gasoline, a strong dollar and, at least in the case of the high-flying Netflix, Kevin Spacey.
Hedge funds are benefiting from their loyalty to the sector that has far and away led the current bull market (the S&P 500 Consumer Discretionary Index is up more than 380 per cent since the bear-market low in 2009, compared with about a 212 per cent gain in the broader index.) The group is leading today's rally even though government data on personal income and spending came in weaker than economists forecast.
The group makes up 20 per cent of the stock holdings of the average hedge fund and also shows a "persistent overweight" in large-cap core mutual funds, according to Goldman Sachs Group. By contrast, the group is only the fourth-largest weighting in the S&P 500, accounting for 12.5 per cent of the index, according to data compiled by Bloomberg.
Fund managers are starting to show signs of life after some dismal report cards in 2014. According to Goldman, 46 per cent of large-cap core mutual funds are outperforming the S&P 500 year- to-date and the typical hedge fund has returned 1.5 per cent after trailing the benchmark index by 11 percentage points last year. Last year, only 25 per cent of actively managed equity mutual funds beat their benchmarks, the lowest rate since 1995, according to data from Morningstar.
Among the most heavily overweighted consumer-discretionary stocks in mutual fund holdings are Priceline Group, Comcast, Starbucks, Lowe's, Target and Nike, according to Goldman. Among the bank's list of "very important positions" for hedge funds are General Motors, DirecTV and Time Warner Cable. (Companies which aren't technically classified as consumer-discretionary stocks but arguably could be - like eBay, Apple and Delta Air Lines - also make the VIP list.)
The message from active fund managers is clear: they believe the rally in consumer stocks is not just a ''House of Cards.''