By Brett Arends
Pariah Capital’s strategy is one thing that’s been winning during the Iran conflict
?Significant exposure to energy stocks has thus far helped Pariah Capital ride out the crisis in the Persian Gulf region.
Pariah Capital, the MarketWatch experiment in beating index funds by purchasing only the investments that the rest of Wall Street hates, is doing it again.
The strategy is booming during the Iran conflict and is up 8% already this year, while regular stocks and bonds are flat or down.
And while it is too late to go back to January and buy the Pariah Capital portfolio at the cheaper prices available at the time, there’s a key lesson here for everyone trying to navigate their own 401(k) plan through the current crisis in the Middle East and at the gas pump.
Pariah Capital, for new readers, is a long-running, somewhat tongue-in-cheek feature whereby we highlight the investments that are most out of fashion on Wall Street and most hated, or at least unloved, by the committees running the biggest pension funds, endowments and other assets.
The methodology is surprisingly – maybe disturbingly – simple. We simply look at the surveys of the world’s biggest money managers conducted every month by Bank of America’s BofA Securities unit. We look at where the managers are most “overweight,” meaning the assets on which they are placing their biggest bets, and most “underweight,” meaning the assets they are shunning.
And then we look at how regular Joes and Janes could invest in the assets the pros are avoiding using regular, low-cost exchange-traded funds.
It works far, far better than it should.
There is method to this madness. These committees and investment managers typically train at the same business schools and learn the same valuation techniques. And there are professional incentives to run with the herd. As a result they tend toward buying and selling the same things.
When they are all buying the same asset, they drive up its price, and it becomes a seller’s market. When they are dumping the same asset, it becomes a buyer’s market.
We here at Pariah Capital simply bet that at the extremes this groupthink tends to go too far, and that over time a reaction will set in. “Reversion to the mean,” as they say on the street of shame.
This January, fund managers proved to be heavily underweight, or underinvested, in five key assets: energy stocks (yes, really), consumer-staples stocks, cash, bonds and stocks listed in London.
This led us to offer a Pariah portfolio for 2026 consisting of 20% each in the State Street Energy Select SPDR ETF XLE, Goldman Sachs Access Treasury 0-1 Yr ETF GBIL, Vanguard Consumer Staples ETF VDC and Vanguard Total World Bond ETF BNDW and 10% each in Franklin FTSE United Kingdom ETF FLGB, which is heavily weighted toward large-cap stocks, and iShares MSCI United Kingdom Small-Cap ETF EWUS, which gives you more small-cap and midcap exposure.
So far this portfolio is up 8% since the start of the year.
The S&P 500 SPX is down about 1%, and a so-called balanced index consisting of 60% U.S. stocks and 40% U.S. bonds is down about 0.4%.
Deep Dive: 15 stocks in the S&P 500 showing double-digit gains since the attack on Iran began
The Pariah portfolio wasn’t constructed with an Iran war in mind, but the allocation has been brilliant – or brilliantly lucky – so far. Energy stocks were booming even before the conflict broke out and are now up 27% on the year. Consumer staples, a defensive asset class that typically does well in times of turmoil, have risen 9%, and U.K. large caps, which include multiple defensive names and oil majors, have earned nearly 5%. Only one asset class in the portfolio, smaller and midsize U.K. companies, is down for the year so far.
But you can’t make money by looking backward. Pariah’s boom reflects a reallocation of assets by big fund managers, who have apparently been shifting into energy stocks and out of things like Japanese and South Korean stocks (both countries are heavily dependent on oil imports).
The question now is how far this has gone and how far it may have still to go. We should find out next week, when BofA Securities is due to release results of its latest monthly fund-manager survey, conducted after the outbreak of war. Stay tuned.
-Brett Arends
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03-13-26 1118ET
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