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Small investors have shown a strong interest in Canadian stocks like Shopify Inc. SHOP-T and Enbridge Inc ENB-T. But bigger investors steering mutual funds are looking elsewhere for opportunities, with bets on companies such as Telus Corp. T-T, Intact Financial Corp. IFC-T and the Brookfield entities.

Should small investors follow big money’s lead?

In a study, analysts at CIBC Capital Markets compared the collective weightings of Canadian equity holdings within Canadian mutual funds to those equities’ percentage slices of the S&P/TSX 60 Index.

The intent of this analysis was to find the stocks whose popularity within mutual funds exceeded their prevalence in the broader market by the widest margins. Popular stocks have a high weighting relative to their percentage of the index; unpopular stocks have a lower weighting.

Those popular stocks include Brookfield Asset Management Ltd. BAM-T – before the recent separation of the asset manager from Brookfield Corp. to create two companies. The stock had a 4.9-per-cent overall weighting within mutual funds, which is well above the stock’s 3.8-per-cent weighting within the S&P/TSX 60 index.

Intact had a 2.5-per-cent weighting, versus a 1.5-per-cent weighting within the index.

Telus had a 2.6-per-cent weighting, above the 1.8-per-cent weighting within the index. That makes the telecom stock more popular among mutual funds than BCE Inc. BCE-T, which has been underweighted by the pros.

Other popular stocks within mutual funds include Canadian Pacific Railway Ltd. CP-T – in contrast to Canadian National Railway Co. CNR-T, which has roughly the same weight within funds as in the index. Suncor Energy Inc. SU-T, Thomson Reuters Corp. TRI-T and another Brookfield entity, Brookfield Infrastructure Partners, are also popular.

“It is safe to say that Canadian mutual fund managers have very high confidence in the Brookfield Group of Companies,” Ian de Verteuil, a CIBC analyst, said in the report.

The data are for June, 2022. While that might seem old, big money tends to move slowly.

Mutual fund managers are consistent with their picks. Popular stocks tend to remain popular over time, while unpopular stocks remain unpopular.

There is a take-away for smaller investors here: Popularity among institutional investors is unlikely to change significantly if there are setbacks or managerial hiccups that can be solved. That could provide stocks that enjoy the support of mutual funds a greater sense of stability over the longer term.

“In our opinion, institutional support provides issuers with a ‘buffer’ against short-term operational issues,” Mr. de Verteuil said.

What’s also interesting is that some of the most unpopular stocks among mutual funds – stocks that are underweighted in funds relative to the S&P/TSX 60 index – tend to be some of the go-to names among retail investors.

According to the TD Direct Investing Index, which draws on the bank’s extensive retail trading data, Shopify has been a popular stock to buy among smaller investors over the past year, even as the e-commerce giant’s share price has retreated from a record high in November, 2021.

Conversely, Shopify remains an unpopular Canadian holding among mutual funds: Its weighting within funds is a slim 0.5 per cent, next to a 2.1-per-cent weighting in the index – a good call, given that the share price has fallen 54 per cent over the past year.

Retail investors have also been drawn to BCE and Enbridge, according to the CIBC report and the TD index, no doubt attracted to their stability and high dividend yields.

Mutual funds, though, aren’t so keen on either stock.

The CIBC report suggests that institutional investors may be concerned that BCE’s profit growth and dividend expansion will trail telecom peers. And big investors might see the market’s weighting of the pipeline sector – where Enbridge is the largest company – as too large.

It might not be worth following the big money on everything it does. But its influence should encourage smaller players to take a closer look at some of what they’re buying, and avoiding.

Full disclosure: The author owns shares in Brookfield Infrastructure and Enbridge.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 19/04/24 4:00pm EDT.

SymbolName% changeLast
Shopify Inc
Enbridge Inc
Telus Corp
Intact Financial Corp
Brookfield Asset Management Ltd
Canadian Pacific Kansas City Ltd
Canadian National Railway Co.
Thomson Reuters Corp

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