Smart Money Analysis: Citigroup in, Goldman out at top funds

Viking Global Investors manager Andreas Halvorsen sold off all his shares in Goldman while adding to his stake in its commercial banking rival.

Halvorsen was part of a broad rush toward Citigroup, which ended 2010 as the most popular holding of the "Smart Money 30," a group of some of the largest stock-picking equity hedge funds.

Investors are betting on brightening prospects for the third-largest U.S. bank -- and insulating themselves from the regulatory risk hanging over Goldman Sachs and other investment banks. Regulatory restrictions on proprietary trading have forced Goldman to close down some of its operations, and investors are uncertain about how the firm can grow long-term revenue when its core businesses are curtailed.

"To the extent that banks are going to be restricted from betting on market movements with their own capital, that creates headwinds to Goldman Sachs' business model," said Adrian Cronje, chief investment officer at Atlanta-based wealth manager Balentine, which indirectly owns bank stocks.

"People are more interested in boring old businesses in the financial sector that take deposits and create high-quality loans," he said.

Other hedge funds buying into Citigroup or increasing their stakes in the fourth quarter included Coatue Capital, Eminence Capital and Lone Pine Capital.

Chilton Investment Co and Lee Ainslie's Maverick Capital sold out of Goldman.

Not everyone followed the trend, though. Chilton also sold out of Citi, and Brookside Capital Investors sold out of Citi even as it raised its Goldman position nearly 10 percent.

COMEBACK MOMENT

The investment banking sector has not been kind to either Goldman or Citigroup; both struggled with slumps in trading and underwriting volumes in later 2010. Citigroup especially surprised investors by posting a 58 percent decline in fixed-income trading for the fourth quarter.

But unlike Goldman, Citigroup has the steadier -- albeit more boring -- businesses of lending and deposit-taking to fall back on, especially in emerging markets, where it is stronger than Bank of America Corp and JPMorgan Chase & Co.

Citigroup is also enjoying something of a comeback moment, having shed the shadow of government support and reported its first full-year profit since 2007. The bank took $45 billion in U.S. bailout funds during the financial crisis and counted the government as a shareholder as recently as December.

Its share price rose almost 43 percent in 2010, closing the year at $4.73. Contrast that with Goldman, which was basically flat on the year.

"Going into year-end you had the government selldown, you had positive news just coming out of Citi in general that things were improving," said Alan Villalon, an analyst at Nuveen Asset Management.