Despite the increased volatility in the global equity and credit markets that kicked off near the end of the third quarter, the S&P 500 still rose more than 1% during the period, and was up more than 8% for the first nine months of 2014. For much of this year we've sensed that the US markets, which rose more than 30% during 2013, have been looking for a reason to sell off. And on several occasions since the start of 2014, concerns about growth and currency stability in emerging and developing markets have provided the spark.
While the selloff that started midway through September continued into October, the markets rallied enough to lift the S&P 500 more than 2% for the month. Market gains have continued since the end of October, with the index likely to close out 2014 with another double-digit gain.
This has kept investor flows into equity funds - primarily tracker funds and ETFs - on par with what was seen during 2012; however, if flows do improve dramatically during November and December we could come close to matching 2013 levels.
With more than three fourths of our Ultimate Stock-Pickers having already reported their third-quarter holdings, we've been able to scour through their trading activity in order to get an early read on how they've been putting money to work during in the most recent period.
Ultimate Stock-Pickers is a concept we’ve developed at Morningstar with one simple goal: to cross check our stock research against the opinions of professional money managers. While the stock analysts at Morningstar spend the majority of their time hunting for quality companies trading at attractive valuations, we would be remiss if we failed to acknowledge the fact that a whole host of individuals outside of Morningstar are engaged in the very same effort.
As you may recall, we focus on both high-conviction purchases and new-money buys when looking at the trading activity of our Ultimate Stock-Pickers. We think of high-conviction purchases as instances where managers make meaningful additions to their existing holdings or make significant new-money purchases, focusing on the impact that these transactions will have on the portfolio overall.
The continuation of the U.S. stock market rally has diminished the number and similarity of purchases and sales across our top managers, with buying and selling activity remaining at the lowest levels we've seen in the last five-plus years.
It also explains the growing cash balances at some of our top managers, primarily those that are not constrained by investment mandates requiring them to be fully invested at all times.
Despite the heightened level of risk aversion that we continue to see from some of our Ultimate Stock-Pickers, many of our top managers continue to put money to work in firms with economic moats—particularly those with wide economic moats—when they are able to find high-quality businesses trading at discounts to their estimates of intrinsic value.
What are the Top Managers Buying?
A quick glance at the high-conviction purchases our Ultimate Stock-Pickers made during the third quarter of 2014 underscores the weaker buying environment our top managers continue to face in this market. Just four of the top 10 high-conviction purchases that were made during the period had more than one of our top managers involved. This compares with periods prior to the first quarter of 2013 when more than half of our list of top 25 high-conviction purchases were made by more than one manager, and the top half of our list of top 10 high-conviction purchases in any given period tended to have four or more of our Ultimate Stock-Pickers making meaningful purchases in each security. That said, the top four names on our list this time around did have multiple managers buying, and nine of the top 10 high-conviction purchases were also new-money buys during the most recent period. EBay (EBAY), in particular, was the target of two new-money purchases.
