Both mutual funds and hedge funds focused on profitability in their stock-buying patterns in the fourth quarter of 2013, continuing a three-year trend, according to analysis by NASDAQ OMX.
Profitability metrics such as earnings quality, return on capital and assets and net margin are the main factors examined in the quarter, the study shows. At the same time, the funds focus less on historical and forward growth rates and value-oriented metrics such as yield and relative value.
‘The sustainability and quality of earnings and returns has been the story of the last three years and should be a central component of any investor relations pitch,’ NASDAQ OMX says in its latest Quarterly Popular Fundamentals Update. ‘We expect a close focus on profitability to continue into 2014.’
The study of 25,000 mutual fund and 1,800 hedge fund new buys and holdings shows the attraction to profitability held steady through the year, even after the Fed announced the tapering of its quantitative easing program. Price performance of tech stocks soared in the second half from the first half while utilities plunged.
Of the top eight factors examined by mutual funds in the fourth quarter, three are profitability metrics, including returns on equity, net margins and returns on assets, the study shows. Hedge funds include four profitability metrics – with the addition of earnings quality – in their top eight list.
But mutual funds set higher standards for some of their profitability metrics: they bought stocks with a return on equity of more than 5.6 percent while hedge funds required a minimum of 1.8 percent. Also, mutual funds looked for returns on assets of more than 6.7 percent while hedge funds set the bar at 5.4 percent.
Trading liquidity, which is not a profitability metric, is the top factor examined by both mutual funds and hedge funds, while return on equity comes second for mutual funds and return on assets is in second place for hedge funds.
