Our author's annual 'Pariah Capital' picks beat the world's top money managers

The investments that the world's top money managers liked the most a year ago ended up doing worse than the investments they liked the least.

Stop me if you've heard this one before.

The eight investments that were most "overweighted" by the world's big money managers, as highlighted here in January 2024, ended up generating a 13.5% return over 2024.

Meanwhile, the investments that they were shunning, the biggest so-called "underweights," earned 16.7%. You can either call that 3.2 percentage points better or 24% better, depending on how you view it.

The gap was even bigger if you measure it not simply over the calendar year, but over the period between the publication of MarketWatch's article on Jan. 16, 2024, and today. During that stretch, the eight investments that money managers favored the most earned 12.8%, while the eight they hated the most earned just over 20%.

That's a quick summary of where we stand as ... drumroll, please ... we unveil our annual update for Pariah Capital and the outlook for the year ahead.

For new arrivals, Pariah Capital is a tongue-in-cheek exercise I launched a few years ago. It was inspired by the monthly BofA Securities Global Fund Manager survey. BofA surveys hundreds of the world's leading money managers, both in the U.S. and around the world - mutual-fund managers, pension-fund honchos and so on. In total, these folks are in charge of about $600 billion of investments. BofA asks them what they like and hate the most in the markets, where they are placing their biggest bets, and what they are avoiding. It's the single most authoritative guide to "conventional wisdom" in the financial C-suites.

I've been following this survey for about 25 years. And over time I started to notice a funny pattern. The assets where these guys were most overweight often tended to fall flat.

Whether it's U.S. tech stocks, European stocks, Japanese stocks, emerging markets, bonds or commodities, these guys seem to be the most bullish when the assets are at the peak and most bearish when they are at the bottom.

When gold (GC00) was just $260 an ounce, it was so out of fashion that nobody even talked about it. Not until 2003, when I actually asked about it at the monthly press conference - back then we used to have press conferences. (I see gold got dropped later - and here it is, booming.)

This is not happenstance. These folks manage gigantic sums of money. And they mostly think alike: Not only because so many of them go to the same schools and get the same financial education, but because they continue to interact with each other. And they know that running with the herd is the best option for their careers.

So when they are all at peak bullishness about frozen concentrated orange-juice futures, and they have already loaded their funds to bursting point with the stuff, you have to figure that maximum bullishness may already be reflected in a correspondingly high price.

As always with these things, it's not a perfect science. In some years, for instance in 2022, the big-money crowd gets it right. And in some years, a random selection of stocks does better than either the "smart" money or Pariah Capital. That was the case last year.

In 2024, for example, the Vanguard Total U.S. Stock Market index fund earned 24% and the large-cap SPDR S&P 500 exchange-traded fund earned 25%.

The usual benchmark for a long-term institutional investor is a so-called balanced portfolio of 60% stocks and 40% bonds. The Vanguard Balanced Index Fund VBAIX, which is 60% invested in the S&P 500 SPX and 40% in U.S. bonds, earned 14.6% in 2024. And the most neutral benchmark earned even less: A global portfolio consisting of 60% Vanguard Total World Stock ETF VT or Vanguard Total World Stock Index Fund VTWAX and 40% Vanguard Total World Bond ETF BNDW earned 10.9% during the year.

So Pariah beat both a U.S.-only and a global "balanced" or 60/40 portfolio during the year. As I pointed out last year, this is getting to be a habit.

What's the picture for 2025?

Surprisingly, it's a bit more complicated. The January BofA Securities survey has just dropped into my inbox. (Actually it came out Tuesday, but I've been busy updating all my maps of the Caribbean with a Sharpie.)

The universe of hated assets is so large we're going to need to be selective.

For example, the survey says that fund managers overall are meaningfully "underweight" 10 major assets. That includes bonds and cash (meaning Treasury bills and short-term bonds). It also includes energy stocks, the stocks of materials companies (ranging from mining companies to, say, paint maker Sherwin-Williams (SHW)), and commodities and commodity futures themselves (meaning oil, copper, gold and so on). It further includes utility stocks, real-estate investment trusts and the stocks both of consumer staples companies (meaning companies that make and sell the things we buy every day - think Procter & Gamble (PG) and Coca-Cola (KO), Walmart (WMT) and Costco (COST)) and the stocks of consumer discretionary companies (meaning companies that make or sell things you don't need to buy every day, and which you might choose to spend more on, or less on, depending on the state of your finances - think Home Depot (HD) and Lowe's (LOW), car manufacturers such as General Motors (GM) and Tesla (TSLA), and travel companies like Booking.com (BKNG) and Hilton Worldwide (HLT)). Oh, and it also includes London-based stocks, as usual.

So to bet against these guys, we could, for example, simply invest 10% each in the iShares Core U.S. Aggregate Bond ETF AGG (or Vanguard Total World Bond ETF BNDW), Goldman Sachs Access Treasury 0-1 Year ETF GBIL, Energy Select Sector SPDR ETF XLE, Fidelity MSCI Materials Index ETF FMAT, iShares S&P Commodities-Indexed Trust GSG, Vanguard Utilities ETF VPU, Vanguard Real Estate ETF VNQ, Vanguard Consumer Staples ETF VDC and Vanguard Consumer Discretionary ETF VCR - plus either 10% in the Franklin FTSE United Kingdom ETF FLGB, or, maybe better, 5% each in that fund and in the iShares MSCI United Kingdom Small Cap ETF EWUS.

But there are some caveats. The first is that by another obscure BofA Securities measure (involving "Z-scores" - don't ask), you could argue fund managers aren't underweight utility stocks, but overweight. That would fit with the performance of the sector, up 19% last year. (The boom in artificial intelligence is driving huge demand for power.)

The second is that there is huge overlap between three of these 10 assets: energy, materials and commodities. They don't move in sync, but they rhyme.

Meanwhile BofA reports that fund managers are seriously underinvested in bonds and cash. (Incidentally, the survey was conducted a week ago - just before bonds started rallying.) And they are heavily overweight equities.

So you could quite reasonably instead skip the utilities ETF and roll the three commodities-related investments into one - such as the SPDR S&P Global Natural Resources ETF GNR, which invests in energy, mining and commodities-related companies around the world. This would result in putting one-sixth, or 16.7%, of the portfolio each into AGG, GBIL, VNQ and the Vanguard consumer funds VDC and VCR, plus either 16.7% in FLGB or 8.3% each into FLGB and EWUS. We'll call this portfolio Pariah Capital for 2025 - although, in honor of Wall Street analysts, "strategists" and fund managers, I reserve the right a year from now to claim to have recommended whichever portfolio did better!

Incidentally, I haven't even looked at the idea of using leveraged ETFs for this. That may merit another article for another day - with huge caveats at the top in flashing fluorescent lights and a loud warning alarm borrowed from the Nostromo, the spaceship in the movie "Alien."

Meanwhile, where are the world's biggest fund managers placing their biggest bets for 2025? The BofA Securities survey gives us the answer. Step forward: Stocks generally, and U.S. stocks in particular, along with stocks in banks, technology companies, healthcare companies and industrial stocks. So we'll call that 16.7% each in Vanguard Total World Stock VT or VTWAX as a proxy for "equities" in general, Vanguard Total U.S. Stock Market VTI or VTSAX for U.S. stocks, plus the Invesco KBW Bank ETF KBWB, Vanguard Information Technology ETF VGT, Healthcare Select Sector SPDR ETF XLV and Industrial Select Sector SPDR ETF XLI.

Naturally I have no idea what the future holds, but a year from now I promise to report my genuine surprise if these "top picks" have outperformed the proverbial monkey throwing darts.

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