In this market where fundamentals long ago ceased to matter, and where positioning remains one of the few remaining sources of alpha, investors have been focusing on lists showing the most over and under-owned stocks. However, contrary to the narrative that the most heavily owned stocks outperform the most shorted, or underowned ones, and vice versa, recently BofA calculated that for the third year in a row, “the Top 10 most overbought stocks have trailed the S&P for each of the past three years, while the Top 10 “most neglected” stocks outperformed the S&P on average by 11.6%.”
This is what BofA’s quant team found:
As flows from active to passive funds have accelerated, one strategy that has worked unusually well for the last several years is a simple positioning trade of selling the 10 most overweight stocks and buying the 10 most underweight stocks by active managers. This single trade has yielded over 16ppt of alpha year-to-date. And implied derisking/ outflows on Brexit alone have been fierce, with the same strategy generating 5.2ppt of alpha just since last Thursday’s close. Even if Brexit’s impact on funds is limited from here, we believe that crowded stocks will likely continue to underperform neglected stocks: a whopping two-thirds of US large cap AUM still resides in active funds – there is likely a lot more to go in the rotation from active to passive.
This post was published at Zero Hedge on Jul 24, 2017.