Friday, July 11, 2008

Smart Money - May You Rest in Peace

I don't mean to rub salt in a wound, since I have had my share of bad investments, but I have always despised the concept of "smart money." It implies that everyone else is not smart money, but rather is "dumb money." I also maintain that a belief in this theory promotes a herd instinct among investors, which is something we desperately need less of.

So to finally put this theory in its grave, here is a list of the largest holders of Freddie Mac (FRE) and Fannie Mae (FNM).

The data is as of 3/31/2008, so there may have been some major changes since then. Also, some of the holders are index funds. The biggest losers appear to be American Capital Group, which holds large amounts of both, mostly in three of its largest funds, the Washington Mutual Fund, the Investment Company of America and the Growth Fund of America. This large ownership is somewhat mitigated by the absolute size of these funds.

If you measure by what percent of an individual mutual fund is held in both FRE and FNMA then the following will be the most hurt:


Lord Abbett Affiliated Fund - 2.2%
Fidelity VIP II Contrafund Portfolio - 1.7%
AMCAP Fund - 1.4%


John Hancock Classic Value Fund - 4.6%
Hotchkis and Wiley Large Cap Value Fund - 3.7%
Legg Mason Value Trust, Inc. - 3.6%
DWS Dreman High Return Equity Fund - 2.7%

The Legg Mason listing is in the fund run by Bill Miller, an investor that is familiar to everyone, and the DWS Dreman High Return Equity Fund is run by David Dreman, another very well regarded Value Investor.


Anonymous said...

Interesting post but... that's the past (and not even the full past), not the future! I've heard of Bill Miller before, so seeing his fund involved gives this a slightly higher possibility of being a good move.

3/31 is only a few months ago - recent enough for these funds to have made investments after the initial price drop, and way way too early to make the final call on these companies as value investments (you don't rank index funds on 2 months of perfomance, do you?). Maybe some people believe that the actual profitability of the business is second to the government's interest in avoiding panic.

TJF said...

You are right on both statements. The shareholder list may have changed a lot, and the last chapter has not been written yet. One day these could be seen as great buys.