Bridgewater Associates, the hedge fund previously run by legendary investor Ray Dalio, is the largest hedge fund in the world with more than $235 billion in assets under management.
Needless to say, Bridgewater has had tremendous success since it was founded in 1975. Recently, the fund reported its 13F filing, which details the stocks it bought and sold in the fourth quarter of 2022.
While Bridgewater owns hundreds of stocks, it is clear the hedge fund bulked up in one sector in particular in the fourth quarter. Let's take a look.
Loading up on financials
Many of Bridgewater's top purchases last quarter were in the financials sector. Four of Bridgewater's top eight buys in the quarter were large traditional banks, while Bridgewater also purchased payments, fintech, asset management, and regional bank stocks. Here are some of Bridgewater's big purchases in the financials sector.
- Bank of America (BAC +1.79%) -- 1.94 million shares
- Citigroup (C +1.74%) -- 1.3 million shares
- Wells Fargo (WFC 1.75%) -- 751,815 shares
- JPMorgan Chase (JPM 1.65%) -- 692,356 shares
- Block (SQ +2.75%) -- 385,500 shares
- Charles Schwab (SCHW +1.92%) -- 365,874 shares
- U.S. Bancorp (USB +0.50%) -- 330,660 shares
Bridgewater has also made some of these stocks larger-sized positions in its portfolio. Bank of America makes up 0.58% of Bridgewater's portfolio; JPMorgan Chase makes up 0.51%; Wells Fargo makes up 0.39%; and Citigroup makes up 0.32%. It may not sound like much, but only 17 of Bridgewater's 953 holdings make up more than 1% of the portfolio, and some of those are exchange-traded funds or index funds.
Why Bridgewater may be bullish
Bridgewater's buying comes at a more challenging time for banks this year as the Federal Reserve's intense interest rate-hiking campaign has quickly put pressure on deposits, with many banks seeing higher funding costs and deposit outflows. Additionally, even though credit quality is quite clean right now, many investors fear it could normalize quickly, especially if there is a more severe recession than anticipated.
But remember, Bridgewater was buying in the fourth quarter and there were definitely opportunities, especially early on in the quarter, to buy banks at more attractive valuations. For instance, JPMorgan's stock is up about 22% over the last six months, although others haven't fared as well.
NYSE: JPM
Key Data Points
Wells Fargo and Citigroup are long-term value plays. Both are dealing with regulatory issues and working on transforming into simpler, leaner operations that will generate better returns for shareholders after years of struggles.
Long term, however, I think banks are much more resilient these days with strong capital levels, multiple lines of business that can pick up the slack when others are down, and much healthier loan reserving for future losses.
Should you follow Bridgewater's lead?
The financials sector may struggle in the near term, with banks facing no shortage of challenges whether it's related to earnings or regulation. But I also think these organizations have come a long way over the years and have much stronger balance sheets than they ever have.
If there is a recession, most large banks will likely be able to navigate through it. If there isn't, which is also a distinct possibility, then I would expect banks to maintain strong credit quality and see strong earnings results in the back half of the year, especially if the Fed stops raising rates and funding costs can stabilize. There may be opportunities to buy these stocks cheaper later this year, but few investors really buy large bank stocks for short-term gains.
Over the long term, I expect banks like JPMorgan and Bank of America to be able to consistently grow their tangible book value, or net worth, which bank stocks trade relative to. Meanwhile, I see others like Wells Fargo and Citigroup as good turnaround plays.
