5 Stocks Endowment Funds Are Buying in 2012

Exxon Mobile
Robert F. Bukaty
Exxon Mobile

Forget the hedge funds and mutual funds for a minute. If you want to follow the moves of a prescient group of professional investors, keep an eye on the endowments.

While traditional institutional investors get a lot of attention from Wall Street, endowment funds are shoveling gains to a different sort of “institution”: colleges, universities, and nonprofits. And with billions of dollars in assets and dedicated in-house portfolio management teams, the moves being made by these institutions of a different sort are a big deal.

University endowment managers have cash (the five biggest college endowments alone manage more than $86.5 billion), and they have talent (veterans include Mohamed El-Erian, the Pimco co-CIO who previously headed Harvard’s mammoth endowment) — and thanks to 13F filings with the Securities and Exchange Commission, we can take a look at the stocks endowments are bullish on this quarter.

To be sure, stocks and exchange-traded funds only make up part of endowments’ assets under management; filings show around $23.7 billion in equity investments as of the most recent quarter. But they also poured significant assets into new stock positions this past quarter.

Today, we'll take a look at five of the biggest position increases endowment funds took on.

5. Exxon Mobil

The biggest position increase for last quarter came from oil giant Exxon Mobil — endowments saw the market value of their Exxon holdings increase by $93.13 million last quarter.

A big part of that performance came from oil prices in the last quarter: With crude prices sitting in the triple-digits for a sustained period, those elevated prices are having a direct effect on Exxon’s profitability. That’s helped to spur a 20 percent rally in shares over the last six months.

As an integrated supermajor, Exxon has its hands in everything from pumping oil and gas out of the ground to transporting, refining, and retailing gasoline on the other end of the process. By having a hand in every step in the process, Exxon generates bigger profits than it otherwise would — and while margins for integrated firms are lower than you’d see at pure E&P names, margins for each step of the process are actually higher than they’d be at an independent firm.

Exxon has been making big bets on natural gas in the past few years, absorbing XTO Energy to dramatically increase the gas mix in Exxon’s production. While that has been a headwind in the last couple of years as natural gas prices struggle to hold their ground, it could become a massive tailwind as consumers look to substitute costly oil with a cheaper energy alternative.

Exxon is a huge company, but investors shouldn’t count out growth because of size alone.

4. Vanguard MSCI Emerging Markets ETF

There’s no two ways about it — endowment funds love exchange-traded funds.

Of the 10 biggest position value increases last quarter, four names were ETFs. If that seems like a surprisingly high number of funds for these funds to own, you’ve got to keep in mind the strategy that these endowment funds are famous for. Many endowments use global tactical asset allocation strategies to manage their money, so ETFs actually provide some of the easiest exposure to the markets that their models dictate they follow.

The biggest ETF position among endowment funds right now is the Vanguard MSCI Emerging Markets ETF, and fund managers increased their stakes in this fund by around 30 percent last quarter. This is the second-straight quarter that endowments have poured money into this fund.

Put simply, the ETF carries exposure to China, Brazil, South Korea, Taiwan, and a number of other emerging economies. Because these countries are projected to sustain high growth levels over the next few years, they make attractive alternatives to the drama-filled economic stories being told in the Western world. And because manufacturing tends to be a bigger component of emerging economies, this fund has heavier exposure to physical good production rather than service-based businesses.

But that’s not the justification that managers are going for to buy this fund. Instead, their models are identifying major technical strength in the ETF, which sends a buy signal to endowment funds. Because tactical asset allocation models typically shoot for low turnover, it’s a strategy that coattail investors actually have a chance at following — even if you don’t have access to the proprietary models that the endowment funds are using.

3. iShares MSCI Brazil ETF

I did say that endowments poured money into two ETF names last quarter.

The other is the iShares MSCI Brazil ETF, a fund that provides endowments with even more exposure to Brazilian equities. This ETF holds a portfolio of 85 publicly traded Brazilian stocks — and it shouldn’t come as any surprise that they’re skewed toward commodity and manufacturing focused names. The ETF has actually done a pretty good jobs of pacing the S&P 500 index in the last six months or so, not exactly what investors would expect from a fund that provides exposure to a very different economy thousands of miles away.

Even so, it’s important to remember that the reason for endowments’ buying the ETF isn’t likely to be a fundamental bet on Brazil. Instead, their tactical models are showing outsized strength in the fund. Endowments increased their positions by $36.8 million last quarter.

2. TripAdvisor

TripAdvisor is enjoying some stellar performance this year, rallying more than 45 percent so far in 2012. That’s proving to be a pretty good move for endowment funds — endowments picked up nearly 600,000 shares of the online travel site in its late 2011 public offering. That means that these funds are laying claim to all of those gains.

TripAdvisor did something different in its business model — it opted to become a destination site first and foremost, fueled by more than 60 million travel reviews posted to its site. Those reviews make TripAdvisor the go-to website for consumers looking for boots-on-the-ground travel opinions on the places they’re considering visiting. That niche provides TripAdvisor with a constant stream of potential advertisers who want to offer travel services to the site’s 50 million monthly visitors.

The decision to split TripAdvisor off from Expedia should end up being beneficial for both firms — it unlocked value for Expedia shareholders late last year, and it should help unlock revenue opportunities for TripAdvisor that wouldn’t have come about with Expedia at the helm. With deep margins and brisk sales growth, TripAdvisor should see its finances continue to improve in 2012.

While this stock certainly isn’t cheap right now, it’s got momentum on its side in the second quarter.

1. Diamond Foods

Small-cap packaged foods company Diamond Foods got a big slap in the face earlier this year when the firm’s massive $2.35 billion deal to buy the Pringles brand fell through on the heels of major accounting problems. Investors got slapped too, watching their position drop by 28 percent year-to-date as Diamond was forced to restate its financials for 2010 and 2011.

Diamond was another new initiation for endowment funds, with institutions buying 351,000 shares for an $11.3 million position in the business. Needless to say, those funds have gotten hammered too this year.

Diamond’s Pringles acquisition would have been a massive purchase for the firm, one that would have seriously shaken up its financial footing. While it would have increased Diamond’s scale considerably, the firm was effectively “betting the farm” on adding a major brand name to its stable of food products. At this point, the accounting problems are still a major concern for investors — but with the massive selloff in the first quarter, the stock is starting to look relatively cheap, especially given the known scale of the scandal.

While the black clouds of uncertainty overhead add some risk to Diamond’s shares right now, speculative investors looking for a bargain might still want to dip a toe in this stock.

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