- Market dynamics are ever-changing, and investors who excel in such conditions need to think quickly and adapt.
- Leon Cooperman’s latest moves are strategic bets designed to decrease the Omega portfolio’s beta while increasing the alpha.
- Another core strategy of Cooperman’s success is spreading the hedge fund’s exposure as thin as possible. The diversification reduces the portfolio’s beta, and the exposure to many sectors increases the chances of beating the market.
Leon Cooperman is the business magnate who helms Omega Advisors, a hedge fund with $3.3 billion under management. The investor is something of a legend and whose success comes from approaching the market from different angles. Cooperman built GSAM, an asset management division of Goldman Sachs. The businessman currently has a net worth of $2.5 billion and retired from Goldman Sachs after serving for over 25 years in 1991.
Cooperman’s approach prioritizes value equities and follows an ascending strategy that identifies the industries and incorporates in-depth fundamental scrutiny. He uses the bottom-up approach to increase and grow his investments and assess their performance based on the S&P 500 index.
Additionally, Cooperman evaluates a company’s revenues, growth potential, liabilities, assets, and profitability before deciding whether to buy or sell. Quite often, he bases his investment decisions on macro trends.
Omega’s portfolio value increased from $775 million in Q1 2020 to $1.60 billion in Q1 2021. The fund has generated a return of 12.07% over the past quarter. The fund portfolio has 45.45% invested in 10 stocks. In the past quarter, the fund added 17 new companies to its portfolio and sold off eight companies. Omega upped its stake in 12 companies and trimmed in 8.
Here, I look at some of his investment tips and tricks that other investors can adopt or follow.
Cooperman cut back on energy assets and avoided a 33.06% decline
Leon Cooperman reduced his holding in the energy sector. It’s worth noting that Energy Select Sector SPDR Fund (NYSEARCA: XLE) recorded a decline around the same time from a high of $73.81 in May 2018 to $49.40 in March 2021, which translates to 33.06%.
After coming to power, US President Joe Biden made a raft of policy decisions through several executive orders. The decisions had immediate and consequential effects across different sectors. A good example is an executive order on climate change in which Biden directed his administration to mitigate the risks and drivers of climate change.
Climate change overshadows aspects of the fossil fuels sector, such as energy, meaning consumers should soon brace themselves for higher fuel prices. To a large extent, higher energy costs will adversely impact the US economy. Factors such as climate change, renewables, and decarbonization will be the leading influencers as the US goes back to the Paris Agreement. The climate treaty aims to reduce greenhouse gas emissions around the globe.
Note that President Biden’s administration has a $2 trillion policy to ensure carbon emissions from the energy sector are entirely eliminated by 2035. However, there will be an infrastructural rollout accompanied by no carbon value chain that might water down these efforts.
The energy prospects are dwindling, but all is not lost as opportunities are likely to pop up soon if the current clean energy approach continues at full speed. The COVID-19 pandemic led to a 37.3% drop in the S&P 500 energy sector as global oil demands dived. It’s worth remembering that oil prices were in the negative territory in 2020 for the first time in history.
Therefore, it follows that Leon Cooperman’s backtracking on energy sector assets was prescient. The uncertainty in the sector – which is only increasing – is raising the risk profile of energy assets.
Pivot to finance sector assets
Leon Cooperman and his team are increasing the Omega Advisors portfolio allocation to the finance sector. The hedge fund’s portfolio allocation of finance sector assets grew from 27.54% in Q1 2020 to a remarkable 40.79% in Q1 2021.
When you look at the global projections, the financial services sector is expected to increase at a compound annual rate (CAGR) of 9.9% in 2021: from $20.49 trillion in 2020 to $22.52 trillion in 2021. By 2025, the market could achieve a valuation of $28.53 trillion, implying a CAGR of 6%.
The projected figures make Omega’s latest play a potentially profitable move. The financial sector is a hot cake currently because more hedge funds are making moves similar to Omega.
The market is more dynamic as it oscillates from the traditional technologically driven stock to recurring value stocks. Indeed, at the turn of 2021, the MSCI World Value Index increased by over 10%, attributed to the United States treasury yields.
On an exciting note, the technologically driven MSCI World Growth Index remains the same as the long-term stocks and their growth or earnings spread across a prolonged duration.
So far, the percent value of future earnings is taking a beating from increasing bond yields. The rising bond yields are also the reason why stock values are ticking up. Financial stocks contribute the most value to the MSCI World Value Index. Since financial stocks perform well under both short and long-term interest rate adjustments, there is potential for the value index to continue rising.
In a recent interview with CNBC, Cooperman said he expects the market to be bearish in the coming year. This is due to interest rates, inflation, and increasing taxes, and he considers himself as “a fully-invested bear.” Earlier in February, he shared the same outlook for the market where he said “There’s a meaningful chunk of the market today that’s in euphoria.”
The Financial Select Sector SPDR Fund (NYSEARCA: XLF) was $31.08 on January 3, 2020, and went up to $37.40 on May 19, 2021, representing a 20.33% increase. Omega is increasing the exposure to the finance sector, as the fund expects the strength to persist.
