Fund managers flee AMC Gamestop Reddit WallStreet Bets powered 'stock meme': what the movement means for small investors - Stock exchanges are on the bandwagon of the meme stock phenomenon-securities that are being bought by retail investors, especially the foreros of the WallStreetBets community, and that are climbing out of control.

That's what happened with GameStop, AMC, or BlackBerry.

In this sense, many operators have benefited from this explosion, especially low capital, while some have missed this speculative opportunity: the managers of investment funds in small and mid caps (small and medium-cap companies), as is the case of these firms whose prices have exploded like a rocket into space.

These investment professionals, for the most part, have avoided these actions, as the publication Barron's reports. "Often, [the stock memes] do not meet our criteria," says Jamie Cuellar, manager of the Buffalo Small Cap fund that manages $ 1.2 billion. "And we don't change our investment process if the market is rewarding these values," he adds.

Chris Retzler, manager of the Needham Small Cap Growth fund of 228 million assets under management, says the same thing: “We would not pursue those names based on our fundamental views,” he tells the US media.

Fund managers flee AMC Gamestop Reddit WallStreet Bets

This is good news for investors, but a challenging stance for fund managers. AMC shares have already climbed more than 418% since May 21. At its height, the stock became the most weighted value of the Russell 2000 index, the selective benchmark against which many small caps funds are measured, with a market value of 28 billion.

Meanwhile, GameStop was the third largest company. Although each company accounts for less than 1% of the index, their massive increase means that they have contributed more to the recent profits of the small cap benchmark.

“I imagine there are a lot of active small cap managers right now very frustrated by what they're seeing,” says Barron's Ben Johnson, Morningstar's director of global ETF analysis.

In the first 5 months of 2021, having exposure to GameStop, having less weighting than the benchmark, has been the biggest obstacle to the profitability of small cap value funds, because stock memes are generally mistreated, which are usually found in the value index.

However, investors of funds should be careful not to attribute an excessive or insufficient return to the fact that a vehicle holds securities such as AMC or GameStop. However, it can be a little harder to beat the benchmark due to the weight of these values or the other way around when they bleed out.

Fund managers flee AMC Gamestop Reddit WallStreet Bets

However, they do not have as much influence as many investors believe: the Russell 2000 has gained 16% so far this year; while AMC and GameStop combined contributed only 1.3% to that increase. This remains a major obstacle for managers to overcome.

Similarly, when stock memes fall, it can result in profits versus benchmarks appearing larger. Ultimately, the most important problem is not the performance of these securities, but their volatility makes it difficult to evaluate the performance of small and mid caps funds.

On the contrary, it should be noted that if AMC and GameStop continue to maintain the current valuations, they are likely to move from the small cap index to the large cap Russell 1000. That means that if they fall again, the collapse will affect the large caps index.

"Managers looking for small cap companies that are underweight in these names are forced to make a difficult short-term decision," writes Chris Harvey, an analyst at Wells Fargo, in a note distributed to his institutional clients.

"Maybe they can add these companies before the rebalancing to limit the risk of relative behavior, or they may cross their fingers and expect their prices to fall before the adjustment occurs," he says.

Fund managers flee AMC Gamestop Reddit WallStreet Bets: Some active funds, including the BlackRock Advantage Small Cap Core have invested in AMC and GameStop shares this year. However, the vehicle has exposure to more than 800 companies, and those two represent less than 0.3% of its portfolio.

Chris Retzler, manager of the Needham Small Cap Growth fund, says in a report that the long-term implication of these movements has not yet been determined, although it must be closely monitored: “According to the current fundamental analysis, it would be difficult to see these actions as value investments at this time."

Another focus of attention related to the stock meme is on how the Federal Reserve's monetary policy shift may affect the economic recovery.

There is growing talk in the market about the possibility of starting to reduce monetary stimuli. Something that could directly affect retail investments.

Fund managers flee AMC Gamestop Reddit WallStreet Bets

Dan Niles, manager of the hedge fund Satori Fund, believes this in statements to the CNBC:”When we get to that point, which I think will be at the end of this year and the Fed begins to take away the easy money, that's when things will start to get dangerous down."

Niles believes AMC shares could triple or even quadruple in size, similar to GameStop's frenzy earlier this year. However, it advises investors to exercise caution when pursuing these securities.

” I think it's best to stay away from these assets, unless you're investing with small amounts and have a diversified stock portfolio, " he describes.

Thus, Niles points out that his stance on the stock memes he considers overvalued will change once the central bank begins to decline. "I think that's when you can go in and say, 'That's enough, we can leave some of these highly overrated names behind,'” he ends.

# Fund managers flee AMC Gamestop Reddit WallStreet Bets #