Oaktree Capital Management is one of the most well-known hedge funds located along the U.S West Coast. It was founded by Howard Marks in 1995 along with a few of his colleagues, with whom he had previously worked at TCW Group, Inc. According to the fund’s latest 13F filing submitted with the SEC for the quarter ending September 30, its U.S equity portfolio was worth over $7.62 billion and its top ten equity holdings accounted for 43.20% of its equity portfolio at the end of that period. The filing also revealed that real estate was the fund’s favorite sector to invest in during the third quarter, with stocks from that sector comprising 22% of the value of the fund’s equity portfolio. In this article we are going to analyze Oaktree Capital Management’s top five equity holdings as of the end of September and try to figure out why this massive hedge fund is betting on them.
Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return 102% over the last 38 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
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#5 Ally Financial Inc (NYSE:ALLY)
Shares Owned by Oaktree Capital Management (as of September 30): 8.63 Million
Value of Holding (as of September 30): $175.89 Million
Oaktree Capital Management reduced its stake in bank holding company Ally Financial Inc (NYSE:ALLY) by 373,000 shares during the July-September period. Although shares of Ally Financial Inc (NYSE:ALLY) ended the first half of the year nearly flat even after witnessing high volatility, they have been on a downward slope ever since the start of July and currently trade down by 14.18% year-to-date. Owing to fewer auto loans the company made, it reported disappointing numbers for the third quarter on October 29. While for the same quarter of last year the company reported EPS of $0.74, this year EPS fell to $0.47. The total auto loans made by the company during the third quarter also saw a 6% year-over-year decline and came in at $11.1 billion. Dan Loeb‘s Third Point sold its entire stake of 10 million shares of Ally Financial Inc during the third quarter.
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#4 Dynegy Inc. (NYSE:DYN)
Shares Owned by Oaktree Capital Management (as of September 30): 9.84 Million
Value of Holding (as of September 30): $203.40 Million
Similar to Ally Financial Inc , the stock of Dynegy Inc. (NYSE:DYN) also remained nearly flat for the first half of the year and the continuous decline it has had since then has resulted in it trading down by 43% year-to-date. Dynegy Inc. (NYSE:DYN) is the only stock in this list in which Oaktree Capital Management increased its stake during the third quarter; the fund bought an additional 45,300 shares of the company. The energy utility company currently operates 35 power plants in five different markets. For the third quarter the company reported a per share loss of $0.23 on revenue of $1.23 billion. The Street had estimated that the company would report EPS of $0.30 on revenue of $1.34 billion for the quarter. After reducing its stake by 23% during the second quarter, Israel Englander‘s Millennium Management again reduced its stake in the company, by 36% to over 2.75 million shares during the July-September period.