GURU: Investing With the Best Minds in the Business

Last week, I took a look at how the “Investing All-Stars” were positioning themselves for the remainder of 2012.

Then—as now—the Eurozone crisis hung over the capital markets like the proverbial Sword of Damocles.  Given the difficulty of investing under this kind of uncertainty, I thought it would be beneficial to peek over the shoulders of some of the brightest minds in the business.   If anyone could navigate the storm, it would presumably be them.

Lucky for us, there are quite a few good shoulders over which we can peek.  All large institutional investors are required to disclose their security holdings to the SEC by reporting via Form 13-F, and this information is made publicly available.  You can dig through the filings yourself if you enjoy reading financial legalese, but you certainly don’t need to. There is an entire niche industry dedicated to “13-F mining,” and several very good online services that do this legwork for you.  A site I’ve used over the years to check up on some of my favorite investors is GuruFocus, and several new entrants are worth noting as well, including InsiderEdge and  AlphaClone.

For anyone looking for an investment theme to follow, using one of these sites is a great place to start.

For those investors not particularly interested in doing their own research, Global X Funds has created a passive ETF that tracks the trades of major hedge fund managers: the Top Guru Holdings Index ETF ($GURU).

GURU’s portfolio is an equally-weighted mix of the “high conviction” picks of the hedge fund managers that Global X follows.  These would include household names like David Einhorn’s Greenlight Capital, John Paulson’s Paulson & Company, and Seth Klarman’s Baupost Capital, among many, many others.

It’s not hard to understand the appeal of the GURU ETF.  You’re getting some of the top investment ideas of the world’s most talented hedge fund gurus but without the high fees that come with investing in the hedge funds themselves.  Rather than pay the standard 2% of assets and 20% of profits, investors pay a modest 0.75% in expenses.   Not bad.

There are a few shortcomings to note, however:

1. The ETF only buys listed stocks, and many major guru investments are not publicly traded.  Consider Warren Buffett’s Berkshire Hathaway (which is currently not tracked by GURU).  Many of Berkshire’s major positions are in private companies.
2. GURU’s positions are equally-weighted.  Higher-conviction stocks within the portfolio are given no greater weight, nor are the risk management aspects of position sizing considered.
3. The ETF only tracks long positions.  If a given “high conviction” pick is really just one half of a pair trade, the ETF managers would have no way of knowing this.
4. As with all guru-following strategies, there is a time lag.  It is entirely possible that the conditions that lead a guru to buy a stock no longer exist by the time that the GURU ETF picks it up.
5. As a new ETF, GURU has very little in assets under management and very thin trading volume.  You have to be careful getting in or out of a position in GURU.

For investors building a long-term “buy and forgot” portfolio, GURU is an ETF I would consider, along with the Vanguard Dividend Appreciation ETF ($VIG) and the PowerShares International Dividend Achievers ETF ($PID) (to see my rationale for VIG and PID, see “Sizemore Capital Allocation Change: Dividend Appreciation” and “European Dividend Stocks”) .

But while the ETF has its merits and a long-term holding, I see more value in using it as a fishing pond for investment ideas.  Rather than buy the portfolio as is it, with all of the faults I described above, why not instead cherry pick the best ideas from the ETF?

With that said, let’s take a look at what GURU holds: GURU fund holdings.

There are some familiar names, such as Microsoft ($MSFT) and Apple ($AAPL).  There are also a few names that, for all the enthusiasm of the gurus who own them, haven’t quite panned out.  Tempur-Pedic International ($TPX) is a glaring example; the former Wall Street darling is down by 50% in the past month alone.

Carlos Slim’s America Movil ($AMX) also made the list, which I find particularly interesting.  It would appear that the gurus are investing in the chief competitor of my favorite Latin American telecom play Telefonica ($TEF).

Next quarter, when the ETF is rebalanced, GURU’s holdings will no doubt be substantially different than they are today.  So, if you are following my suggestion to use GURU as a fishing pond, make sure that you review your holdings on at least a quarterly basis.

I’m betting that Tempur-Pedic doesn’t make the cut.

Disclosures: Charles Sizemore contributes articles to GuruFocus and InsiderEdge on occasion.  MSFT, PID, TEF and VIG are currently held by Sizemore Capital clients. This article first appeared on MarketWatch.