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What Top Fund Managers Are Buying and Selling

Across the board, Morningstar Medalists got defensive in the third quarter.

Stock market volatility persisted in 2020's third quarter, providing fund managers with ample buying and selling opportunities. On top of the turbulence, 136 companies completed IPOs on either the Nasdaq or New York Stock Exchange, a more than 140% increase from 2019's third quarter.

To get a sense of how active stock managers positioned themselves during this volatility, we looked at the buys and sells of the aggregated portfolios of all U.S. equity funds with Morningstar Analyst Ratings of Gold, Silver, or Bronze. Overall, Morningstar Medalist managers shifted into more-defensive names, such as tobacco company Philip Morris PM and beverage company Coca-Cola KO, while trimming strong-performing mega-cap technology and Internet stocks like Microsoft MSFT, Apple AAPL, and AMZN.

Here is a look at some of the medalists' most popular trades, broken out by market capitalization. The following data represents 168 large-cap, 63 mid-cap, and 59 small-cap strategies that have at least one medalist-rated share class and reported a third-quarter portfolio as of Nov. 18, 2020.

Large-Cap Medalists On the whole, large-cap medalists took a defensive stance in the third quarter. They upped their stakes in consumer defensive, utilities, and basic-materials stocks by an estimated 2.5%, 2.0%, and 1.1%, respectively, while reducing their net positions in technology and healthcare stocks by an estimated 2.1% and 2.0%, respectively. American Funds led the charge into Philip Morris as four of its funds combined to buy up over $600 million in the tobacco company, increasing the aggregate medalist stake in the company by 11%. Mondelez International MDLZ also attracted medalists' attention; the managers upped their interest in the global food company by over 7%. On the other hand, medalists were torn on electric car maker Tesla TSLA as its shares nearly doubled in the quarter. Collectively, the medalists pared their total exposure by over 20%, with Fidelity leading the sell-off. Fidelity Advisor Equity Growth EPGAX and Fidelity Growth Discovery FDSVX liquidated their positions, and Fidelity Blue Chip Growth FBGRX sold off 40% of its $1 billion stake. But 11 medalists were unfazed by Tesla's meteoric rise and opened new, though generally small, positions in the company.

Despite generally paring their tech and healthcare exposures, large-growth managers displayed an appetite for IPOs in those sectors. Medalists crowded into cloud-based data warehousing firm Snowflake SNOW following its September IPO. Half of the large-growth medalist funds started positions in the company, pouring over $1.2 billion into it. They piled into a handful of other tech and healthcare IPOs as well, with GoodRx GDRX, Unity Software U, and Oak Street Health OSH each attracting over $100 million in investments.

The medalists grew weary of some controversial stocks. More than a third of the large-cap medalists that owned troubled airplane manufacturer Boeing BA at the start of the quarter sold it by the end. Medalists also dumped nearly all their shares of Cleveland-based utility FirstEnergy FE after bribery allegations surfaced in July.

Even while adding defensive names and trimming big tech stocks because of valuations, large-cap managers still held significant stakes in the tech and Internet giants like Microsoft, Apple, Alphabet GOOGL,, and Facebook FB. Microsoft's popularity spanned all styles--5% of large growth, 81% of large-blend, and 69% of large-value medalists owned it.

Mid-Cap Medalists Unlike large-cap categories, where a few stocks can dominate an index, mid-cap funds can have wider opportunity sets and more diverse portfolios. Like their large-cap colleagues, the mid-cap medalists expanded their consumer defensive stock stakes, increasing their interest in the sector by an estimated 2.9%. The group's cumulative holdings in Chegg CHGG, the online education services provider, increased by roughly 40% as Bronze-rated funds from Artisan, Invesco, and Wells Fargo bought up more than $100 million of the company's stock. Medalists also imbibed in breweries, increasing their stake in Boston Beer Company SAM by nearly 300%, led by new positions from Artisan Mid Cap ARTMX and Invesco Discovery Mid Cap Growth OEGAX. Energy also attracted capital as managers took advantage of depressed valuations and bought shares of diversified refiners like Marathon Petroleum MPC and Phillips 66 PSX.

Echoing their large-cap counterparts again, mid-cap medalists cut their collective technology stake in the third quarter. Funds from Artisan, Amundi Pioneer, and JPMorgan shed Zscaler ZS as the digital security company's stock rose over 200% since the beginning of the year. The medalists sold nearly three fourths of their combined stake in financial technology company Fiserv FISV as its market cap crested $70 billion, $60 billion higher than the Russell Midcap Index's average market cap. Similarly, the medalists sold off half of their stake in Workday WDAY as it surpassed $50 billion in valuation. Mid- and small-cap managers often must trim or sell stocks when they grow beyond their mandates' upper limits, and that likely played a role in those two sales.

Small-Cap Medalists Small-cap medalist managers also took advantage of the active third quarter IPO market. Eight of the 12 most popular new positions were IPOs. The IPO of StepStone Group STEP, an investment advisory firm focused on private markets, drew the widest interest; funds from T. Rowe Price, MFS, Goldman Sachs, and Franklin Templeton, among others, bought in. Duck Creek Technologies DCT attracted the most money; Silver-rated T. Rowe Price New Horizons PRNHX led the way by opening a $85 million position in the insurance-technology company.

Like the mid-cap managers, small-cap medalists also bought energy stocks on a flow-adjusted basis, with oil and gas exploration company WPX Energy WPX attracting the most capital. Gaming and resorts stocks, which had been beaten down heading into the third quarter, were popular, too. More than $500 million flowed into those areas, as T. Rowe Price New Horizons increased its Vail Resorts MTN stake by roughly 5 times, and Franklin Templeton and Baron Capital plowed a combined $200 million into DraftKings DKNG, a fantasy sports and gambling platform whose stock price climbed as a number of states legalized sports betting in the quarter.

Mergers and acquisitions complicate attempts to understand small-cap manager sales. Successful small-cap companies often become acquisition targets for larger firms. Indeed, many popular small-cap holdings, including Mobile Mini, Principia Biopharma, Franklin Financial Network, and Immunomedics, sold themselves in the third quarter. Other popular holdings, such as Datadog DDOG and DocuSign DOCU, grew into mid-caps and triggered valuation-related sales.

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