Back in November, I wrote about the newest addition to stable of guru-following strategies — the iBillionaire Index – and I compared it to the two existing guru ETFs currently trading, the Global X Top Guru Holdings Index ETF (GURU) and the AlphaClone Alternative Alpha ETF (ALFA).
iBillionaire produces an index, but there is no investment product designed to track it … yet. That will change, however, as iBillionaire expects to launch an ETF later this year.
The basic rationale behind all three guru-following strategies is the same: You’re looking to piggyback on some of the best ideas of the brightest minds in the business — without having to meet the net worth requirements or onerous account minimums that would come with investing in the gurus’ hedge funds themselves. (And of course, you’d like to avoid the management fees!)
So, with all of that said, how did the various strategies perform last year?
Quite well, in fact. In a year in which the S&P 500 was up 29% (not including dividends), ALFA was up 35% and GURU was up a whopping 47%. The iBillionaire Index (not pictured in the stock chart) split the difference, up 42% for the year.
Now for the question you really want answered: Which of the three guru-following strategies is the best option for 2014?
That’s really going to depend on what your portfolio objectives are. If you are looking for a large-cap, U.S.-focused substitute for the S&P 500, then iBillionaire is the clear choice. It selects the 30 top S&P 500 stocks based on ownership by billionaire fund managers, and it’s long-only. It’s the only one of the three strategies for which the S&P 500 is an appropriate benchmark.
GURU tends to have a large-cap bias (though smaller than iBillionaire), and it is classified as a “large blend” fund by Morningstar. But it also holds its share of foreign stocks — including Mexico’s Cemex (CX) and America Movil (AMX) and Britain’s Delphi Automotive (DLPH) — and smaller up-and-comers like internet radio pioneer Pandora Media (P). And GURU’s more flexible mandate means that the composition of its portfolio is likely to change a lot more over time. Hypothetically, GURU could morph into a small-cap international value fund if those were the stocks that the investors it tracks were buying most heavily.
Not that there is anything wrong with that, of course. I’m actually a big fan of small-cap international value stocks. The point I’m making is simply that GURU does not benchmark particularly well to the S&P 500.
And finally, there is ALFA. Of the three strategies, ALFA currently has the smallest-cap bias; Morningstar classifies ALFA as a mid-cap growth fund. ALFA also has one unique characteristic that makes it very different from both GURU and iBillionaire — it has the ability to hedge by going short. The ETF will shift half of the portfolio into an inverse S&P 500 fund when the S&P ends a month below its 200-day moving average.
That ability will come in handy next time we have a major bear market. But in a raging bull market it is a moot point, and in a choppy, rangebound market it can actually be detrimental to returns. Strategies that depend on momentum signals tend to get whipsawed in sideways markets.
So, again, the best guru-following strategy will really depend on what your portfolio objectives are and on what sort of market you expect.
On a side note, iBillionaire recently completed its quarterly rebalancing, and the index had quite a bit of housecleaning to do; 7 of its 30 holdings were replaced. Leaving the index were Metlife (MET), Amazon.com (AMZN), SLM Corp (SLM), International Paper (IP), CF Industries Holdings (CF), Aetna (AET) and Goodyear (GT). It is interesting that 2 of the 7 were health insurance companies; it implies the “Obamacare trade,” to the extent there ever was one, is over.
The iBillionaire Index replaced these deletions with the following additions:
- Micron Technologies (MU). Micron Technologies makes dynamic random access memory chips, flash memories and other semiconductor components. Sector: Technology. Billionaire Holders: Seth Klarman, David Einhorn, Ray Dalio, George Soros.
- Dow Chemical (DOW). Dow is a diversified chemical company that provides chemical, plastic and agricultural products to consumer markets. Sector: Materials. Billionaire Holders: Daniel Loeb, George Soros, Ray Dalio.
- Anadarko Petroleum (APC). Anadarko Petroleum is an independent oil and gas exploration and production company with international operations. Sector: Energy. Billionaire Holders: T. Boone Pickens, Daniel Loeb, David Einhorn, Ray Dalio.
- Cognizant Technology Solutions (CTSH). Cognizant provides custom IT consulting, technology and outsourcing services. Sector: Technology. Billionaire Holders: Steve Mandel, Ray Dalio.
- DaVita (DVA). DaVita provides a variety of healthcare services throughout the U.S. and abroad. Sector: Healthcare. Billionaire Holders: Warren Buffett, Steve Mandel, Ray Dalio.
- Gap (GPS). Gap is an international speciaity retailer operating retail and outlet stores. Sector: Consumer Discretionary. Billionaire Holders: Edward Lampert, Chase Coleman, Ray Dalio.
- Fidelity National Information (FIS). Fidelity provides a wide array of payment services, including credit and debit card processing, electronic banking and merchant card processing. Sector: Finance. Billionaire Holder: Chase Coleman.
I was particularly happy to see DaVita make the list. DaVita is a current recommendation of Macro Trend Investor first and foremost because of the strong demographic trends supporting its business — providing dialysis to sufferers of kidney disease. But the fact that it is a major holding of Warren Buffett’s Berkshire Hathaway (BRK.A) has always been something I consider a nice bonus.
At the time of publication, Sizemore’s Macro Trend Investor was long DVA.
Charles Lewis Sizemore, CFA, is the editor of Macro Trend Investor and chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.