As the year comes to a close, many equity markets are still seeking to reclaim pre-recession levels and the outlook for 2011 is far from certain. Recent weeks have seen renewed worries over the potential scope of the European debt crisis, as Ireland has become the latest fiscal nightmare for the euro zone. Stateside, financial news is dominated by increasingly heated clashes over legislation that would extend Bush-era tax cuts and unemployment benefits, perhaps promoting growth and consumer spending while putting Washington further and further into debt. And while the holiday shopping season seemingly got off to a good start, it remains to be seen just how aggressively consumers will spend with unemployment perilously close to double digits [see also Three ETFs To Watch If Roubini Is Right About Europe].
In uncertain times, many look to the world’s most successful investors for guidance, hoping to glean some idea of what lies ahead from the actions and portfolios of those with stellar track records. David Tepper, star hedge fund manager and founder of Appaloosa Management, has been one of the most successful investors of the last decade. After generating huge returns by focusing on distressed bonds in 2001, Tepper has continued to rack up big gains in recent years. His name is now associated with the business school at Carnegie Mellon University (Tepper made a $55 million donation), and the hedge fund manager is also part-owner of the NFL’s Pittsburgh Steelers. While Tepper may not be a household name on par with the likes of Warren Buffett or George Soros, his investment style and world-beating results have caught the eye of many [see also ETFs To Invest Like Bill Gates].
Tepper’s style over the past decade reflects to some extent the old Buffett mantra that advises to be “greedy when others are fearful and fearful when others are greedy.” Tepper made a big chunk of his fortune (and his name) by investing in companies that were at one time considered “distressed,” and his often-contrarian style has paid off repeatedly for both himself and his investors. In 2001, he generated returns of about 60% in distressed bond markets, compared to the 12% loss accrued by the S&P 500. In early 2009 Tepper poured into the financial sector of the U.S.; the call on the market bottom yielded his fund an estimated $7 billion in profits for the year. “The U.S. government had made its intention to bail out the financial sector perfectly clear,” writes Vishesh Kumar. “While the market second-guessed what might happen, Tepper started loading up. “
While not all investors have direct access to Tepper’s fund and investment strategies–in fact, most have nowhere near the required capital–regulatory filings gives some insight into his recent strategies. Below, we outline three ETFs that investors can use in order to play the investment philosophies of one of Wall Street’s most successful gurus.
iShares Dow Jones U.S. Health Care Index Fund (IYH)
IYH makes the list due to Tepper’s heavy allocations to a number of major pharmaceutical firms. Pfizer, Merck, and Johnson & Johnson all appeared in the top 15 holdings of Appaloosa’s popular fund at the last filing date. Most notably among these companies, Pfizer is the third largest holding, accounting for $284 million of the fund, with Appaloosa increasing its position in the pharma giant by 5.2 million shares in the third quarter of 2010. Though not quite as significant as the previously named companies, Tepper’s fund also had considerable holdings in UnitedHealth Group and health care technology specialists Medtronic.
One option for replicating Tepper’s bet on the health care industry is with iShares‘ IYH, which tracks the Dow Jones U.S. Health Care Index. The fund’s top holdings include Johnson & Johnson, Pfizer, Merck, UnitedHealth Group, and Medtronic. This ETF keeps most of its assets in giant and large cap companies, all of which are based in the U.S.
SPDR KBW Bank ETF (KBE)
Tepper’s move into U.S. financials in 2009 paid off big for him, and though the third quarter saw the fund sell off a portion of its positions in the financial sector, banking firms still make up a large portion of total assets. In fact, five of the top ten holdings of the fund include Bank of America, Wells Fargo (preferred shares), Citigroup, Wells Fargo (common shares), and Fifth Third Bank (with SunTrust Banks coming in at number 11). Though Tepper is clearly not as bullish on financials as he was in 2009, it seems that he still feels this battered asset class has room to grow [see also Financial ETFs Soar On New Basel Rules].
Exposure to domestic banks can be achieved through a number of ETFs, including State Street‘s SPDR KBW Bank ETF (KBE). This fund’s top holdings show’s overlap with Tepper’s fund, including: Citigroup, Bank of America, Wells Fargo, SunTrust Banks, and Fifth Third Bancorp. With 25 holdings, KBE divides its assets relatively evenly into giant, large, and medium market cap firms. Anyone who owned this ETF in the beginning of 2010 has likely been quite pleased; the fund is up about 20% YTD.
HOLDRS Merrill Lynch Semiconductor (SMH)
The third quarter of 2010 marked a new path for Tepper and his fund. As Appaloosa slowly exited massive financial stakes, it moved assets into large cap tech equities. In fact, the third largest tech buy for this most recent quarter came in the form of a roughly $52 million purchase of the SMH HOLDR. Along with purchasing a large amount of the ETF itself, Tepper also doubled down by acquiring a number of SMH’s fundamental holdings. These companies include: Texas Instruments, Intel, Applied Materials, Analog Devices, and Altera. With the explosion of demand for smartphones, and the inevitable move to cloud computing, these semiconductor firms could surge in the coming years, as new technologies will demand more and more from this industry [see also Three ETFs For Smart Phone Exposure].
This HOLDR is home to the big players in the semiconductor industry, with Texas Instruments (22%), Intel (21%), and Applied Materials (11%) accounting for the top three holdings. The fund allocates all of its assets within the U.S. while focusing on large and medium market cap companies. Up to this point in 2010, SMH has returned about 13%, and also makes a healthy dividend payment [see also Semiconductor ETF Gets A Makeover].
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Disclosure: Photo courtesy of Joey Gannon. Jared is long PFE.