'Follow the hot hands': HSBC lays out a coronavirus-investing playbook focused on funds that have beaten the market for years - and shares the top stocks in each

Marley Jay

Apr 1, 2020, 19:42 IST

'Follow the hot hands': HSBC lays out a coronavirus-investing playbook focused on funds that have beaten the market for years - and shares the top stocks in each

Reuters / Gary A. Vasquez

HSBC strategist Alastair Pinder identified a group of hedge funds that topped a global benchmark for three consecutive years and have also outperformed during the last few tumultuous weeks.
Pinder says there's evidence funds with that kind of track record will continue to win, and investors following their approach since 2012 would have handily beaten the market.
He also revealed the funds' top holdings in the US, Europe, emerging markets, and Japan.
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For years, sports fans and investors have debated whether there is really such a thing as a "hot hand." That is, if a player or investor is performing very well, are they likely to keep up the streak?

Alastair Pinder, global equity strategist at HSBC, says he has an answer - at least for the investing world here and now. After evaluating data on more than 400 hedge funds, he says he's identified the tactics that have worked for the best global funds of recent years.

"At least from a short-term perspective we find that 'Hot Hand' funds can often continue their strong momentum and winning streaks," he wrote in a note to clients.

He's zeroed in on a group that not only beat the FTSE All-World Index every year from 2017 to 2019, but also outperformed during the turmoil that's afflicted markets since the coronavirus pandemic began.

"Our current subset of 'Hot Hand' funds have outperformed global equity markets by over 40% since 2012, or 4.8% on an annualized basis and have beaten the benchmark considerably over the last few weeks despite the turbulence," Pinder wrote.

Over that time, following those hot hands and investing in the countries or industries they liked best while shorting those they liked the least would have substantially beaten the market, he says. That makes them a particularly appealing source of ideas.

"Key contrarian ideas over the last three months by 'Hot Hand' funds have been to increase their active weight towards Semiconductors, Retailing and Energy, while cutting exposure to Capital Goods and Materials," Pinder said.

Investors can implement those ideas using ETFs like the VanEck Vectors Semiconductor ETF, SPDR S&P Retail ETF, and Vanguard Energy Index Fund.

The funds also overweight the US, China, and India compared to their benchmark, a strategy investors can implement with funds like the SPDR S&P 500 ETF, Xtrackers MSCI All China Equity ETF, and iShares MSCI India ETF. Perhaps not surprisingly, these funds bet big on tech and consumer discretionary stocks.

Pinder says the average fund in the hot hand group has 34% of its assets in tech stocks, which is double the fund's benchmark.

"On the other hand, they have are less convinced on UK equities as well as Canada and Japan. South Korea, Brazil and Russia are the EM markets in which 'Hot Hand' funds have a relatively small allocation," he wrote.

Pinder also combed through the holdings of the funds to find their biggest investments in several major regions. In the US, the hot hands top ten is made up of Microsoft, Amazon, Alphabet, Visa, Mastercard, UnitedHealth, Adobe, Thermo Fisher, Estee Lauder, and Facebook.

In Europe, their top bets were LVMH, Nestle, Partners Group, Novo Nordisk, L'Oréal, RELX, Adyen, Roche, Hermès, and Atlas Copco, and in emerging markets, their largest allocations went to Tencent, HDFC, Alibaba, TAL Education, Samsung, Ping An Insurance, Kotak Mahindra Bank, Kweichow Moutai, PT Bank Central Asia, and Taiwan Semiconductor.