Morningstar Ultimate Stock-Pickers: Top 10 High-Conviction And New-Money Purchases by Greggory Warren, CFA, Morningstar
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Top equity-fund managers made few high-conviction purchase in the third quarter, continuing a nine-quarter trend.
When we relaunched the Ultimate Stock-Pickers concept in April 2009, our primary goal was to uncover investment ideas that not only reflected the most recent transactions of some of the top investment managers in the business but were timely enough for investors to get some value from them. By cross-checking the most current valuation work and opinions of Morningstar’s cadre of stock analysts against the actions of some of the best equity managers in the industry, we hoped to uncover a few good ideas each quarter. With more than 85% of our Ultimate Stock-Pickers having reported their holdings for the third quarter of 2015, and the market correction during the period affording many of them with an opportunity to put capital to work, we’ve got a pretty good sense of what stocks they have been buying during the past several months.
When looking at our Ultimate Stock-Pickers’ purchases, we focus on both high-conviction and new-money buys. We think of high-conviction purchases as instances where managers have made meaningful additions to their existing holdings (or make significant new-money purchases), focusing on the impact that these transactions have on their overall portfolios. We do, however, remain cognizant of the fact that the decision to purchase any of the securities we are highlighting could have been made as early as the start of July, 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. It is even more critical for investors to look to these metrics when the market is being as volatile as it has been lately.
Our early read on the buying activity during the third quarter and first part of the fourth quarter 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 ninth straight calendar quarter where our top managers have generated incredibly low levels of buying activity. Of the conviction buying that did take place, most of it 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 to the top 25). The conviction buying was also far more focused on firms with low and medium uncertainty ratings, a signal to us that our top managers are sticking with established holdings where they feel they have more visibility into results over the near to medium term when putting more money to work.
One of the more noteworthy transactions that we saw during the third quarter, which did not make the early lists of purchases by our Ultimate Stock-Pickers was the outright acquisition of narrow-moat-rated Precision Castparts by wide-moat-rated Berkshire Hathaway during the first week of August. Part of this was because Berkshire, which had yet to report its third-quarter holdings when this article was written, has only tendered for all of the outstanding shares of Precision Castparts that it does not already own (a deal that is expected to close in the first quarter of 2016), and several of the managers that did hold the shares in Precision Castparts prior to the deal being announced took advantage of the acquisition announcement to sell their stakes in the firm.
– source: Morningstar Analysts
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