Model Portfolios | News | Contact
Articles

Guru’s February 2016 Rebalance Report

Mar 17, 2016

View all Global X Research Team's ArticlesGlobal X Research TeamGlobal X Research Team

On February 26th, the Global X Guru™ Index ETF (GURU) underwent its quarterly rebalance. Explore the February 2016 Guru Report here.

  • Between the most recent quarterly rebalances (November 25th to February 25th), Guru is down -12.95%, while the S&P 5001 is down -6.02%.
  • Much of the underperformance is attributable to the continued struggles of major equity hedge funds, which are down almost -7% this year
  • Guru’s February rebalance saw above-average turnover with 16 stocks leaving the fund and 21 new additions. The majority of companies leaving are shorter-term holdings that had generated negative returns.
  • The select list of hedge funds from which Guru sources its high conviction ideas was updated, resulting in 28 new hedge funds being added to the list and 21 being removed.
  • We believe the higher overall turnover in this rebalance is a positive for Guru as equity hedge funds look to find new ideas that will reverse their recent fortunes. In addition, Guru’s more aggressive tilt towards cyclical and sensitive sectors may set up the fund for stronger returns if the market returns to a more bullish environment.

Performance

In the Guru: 2015 Year in Review blog post, we discussed how Guru’s performance is often a magnification of the returns experienced by equity hedge funds because Guru is a long-only fund, while equity hedge funds can have short positions and therefore less market exposure. Unfortunately, the trend of poor returns from equity hedge funds in 2015 has largely continued as the HFRX Equity Hedge Index2 returned -6.93% from the November 2015 to February 2016 rebalances. Over the same period Guru was down -12.95% and the S&P 500 was down -6.02%3.

Guru Q1 2016 Standard Performance

For GURU performance data current to the most recent month- and quarter-end, please click here.

An attribution analysis of Guru’s performance over this time demonstrates that 70% of the fund’s underperformance came from the selection effect, or the sector-agnostic returns from concentrated stock picks by major hedge funds. The high selection effect demonstrates that many hedge funds have been unsuccessful with their individual stock picking regardless of the sector. The allocation effect, or the fund’s over or underweight to different sectors, contributed to 30% of its underperformance. Most of the allocation effect is attributable to the more aggressive collective positioning of high conviction hedge fund picks, which has led to Guru underweighting sectors that tend to do better in selloffs, such as utilities, telecoms, and consumer staples.

Rebalance

Guru’s latest rebalance saw the removal of 16 of the fund’s 42 components and the addition of 21 new holdings. Guru tracks concentrated positions reported in 13f filings from a select list of hedge funds for which the 13f valuation is most valuable. The February rebalance typically exhibits higher than average turnover because not only are new 13fs released in February, but the select list of hedge funds tracked by Guru is also refreshed to ensure only large, low turnover hedge funds with concentrated positions are included in the select list. 28 hedge funds were added to the select list and 21 were removed, bringing the total number of hedge funds followed by Guru to 60.

Guru Holdings Changes

The majority of the stocks leaving Guru during this rebalance have been shorter-term losers, as hedge funds cut their losses on companies that had not performed. The winners that were removed tended to be longer-term high-returners, as hedge funds took their gains in these positions.

Number of Holdings Removed from Guru Avg Return while in Guru Avg Time in Guru
Winners 5 62.6% 2.7 Years
Losers 11 -19.2% 1.5 Years

Despite the significant turnover in individual holdings, Guru’s sector over/under weights compared to the S&P 500 remained largely in-line with the previous rebalance. The fund continues to be heavily overweight towards consumer discretionary stocks and financials, while maintaining an underweight to consumer staples and health care. Guru increased the magnitude of its underweighting to energy stocks while becoming virtually neutral-weight on industrials.

Sector Over/underweight vs S&P 500

Looking forward, we believe the selling of short term losers and higher overall turnover during this rebalance is a positive ‘spring cleaning’ for Guru, as equity hedge funds look to find new ideas that will reverse their recent fortunes. In addition, Guru’s more aggressive tilt towards cyclical and sensitive sectors may set up the fund for stronger returns if the market returns to a more bullish environment.

Category: Articles

Topics: Other Equities

Investing involves risk, including the possible loss of principal. The 13F filings used to select the securities in the Underlying Index are filed by each hedge fund approximately 45 days after the end of each calendar quarter. Therefore a given hedge fund may have already sold its position by the time of the 13F filing. High short-term performance of the fund is unusual and investors should not expect such performance to be repeated. The fund’s manager has the ability to employ up to 20% leverage, which may accelerate the velocity of potential gains or losses. The fund invests in small and mid-capitalization companies, which have greater volatility and less financial resources than large-capitalization companies. Furthermore, the fund may hold foreign securities which are subject to different risks than domestic securities, including foreign currency fluctuation, different financial and accounting standards, and political instability. This information is not intended to be individual or personalized investment or tax advice. Please consult a financial advisor or tax professional for more information regarding your tax situation. The fund is required to distribute income and capital gains which may be taxable. Buying and selling shares will result in brokerage commissions and tax consequences. Shares are only available through brokerage accounts which may have minimum requirements. Only whole shares may be purchased.

Solactive AG Indexes have been licensed for use by Global X Management Company, LLC. Global X Funds are not sponsored, endorsed, issued, sold, or promoted by Solactive AG, nor does this company make any representations regarding the advisability of investing in the Global X Funds. Global X Management Company, LLC serves as an advisor to the Global X Funds. The Funds are distributed by SEI Investments Distribution Co., which is not affiliated with Global X Management Company or any of its affiliates.

Carefully consider the fund’s investment objectives, risks, and charges and expenses. This and other information can be found in the fund’s prospectus which may be obtained by calling 1-888-GX-FUND-1 (1.888.493.8631), or by visiting www.globalxetfs.com. Please read the prospectus carefully before investing.

Shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Global X NAVs are calculated using prices as of 4:00 PM Eastern Time. The closing price is the Mid-Point between the Bid and Ask price as of the close of exchange.