Institutional investors prefer financials

(March 2006) Retail investors seeking insight on ‘where to invest next’ often look to the institutional side, reasoning that the largest money managers can afford superior research. While the energy sector may have been the obvious story in the recent past, institutional pooled equity funds continued to favour financial services stocks in the fourth quarter of 2005, according to Morningstar Canada.

Morningstar tracks more than 900 institutional pooled funds and releases data each month through its Principia for Pooled Funds desktop software.

The average Canadian Equity (Pure) pooled fund increased its allocation to financials to 32.3% in the fourth quarter, up from 20.6% in Q3. The average “regular” Canadian Equity pooled fund held 30.7% of its portfolio in financials, up from 29.5%.

This should come as little surprise, given the hefty weighting financial stocks have on the benchmark index, at 31.6% of the S&P/TSX Composite. Energy, the second largest sector on the TSX, also made up the second largest holding among Canadian pooled funds.

Canadian Equity (Pure) managers allowed their energy holdings to dip 0.4% to 24.2%, while the average Canadian Equity pooled fund held 27.4% in energy, up from 27.1% in Q3. Canadian Pure funds, on average, held about half as much cash as standard Canadian Equity funds, at 2.5% versus 4.9%.

There was little change in asset allocation among balanced funds, on average, in the fourth quarter. Cash positions in the average balanced fund remained unchanged, at 7.4%, while Canadian bond positions edged lower by 0.1% to 33.4%. Canadian equity positions slipped the most, down 0.5% to 32.6%, while foreign equity was trimmed 0.1% to 19.7%.

Reflecting the more diverse markets south of the border, financials made up a significantly smaller portion of U.S. equity pooled fund assets, but at 19.4% — up from 18% — they remain the largest sector allocation. Technology stocks made up the second largest sector, at 15.5%.

Among international equity funds, financials made up 23.3% of holdings, up from 21.4%, though short of the benchmark MSCI EAFE weighting of 27.8%. Cash positions dipped from 7% in the third quarter, to 6.1%.