Ken Fisher’s Fisher Asset Management is one of the biggest funds out of the universe of around 730 hedge funds that we track at Insider Monkey. Few may know it, but Ken Fisher started his fund back in 1979 with only $250. Since then, the fund’s assets under management has grown by several orders of magnitude to say the least, as Fisher wisely rode great stock picking ability to a firm with billions of dollars in assets, making him a billionaire in the process. Given that Fisher Asset Management recently filed its 13F for the third quarter, let’s take a closer look at the fund’s top financial picks heading into the final quarter of 2105, led by JPMorgan Chase & Co. (NYSE:JPM), Berkshire Hathaway Inc. (NYSE:BRK.B),Wells Fargo & Co (NYSE:WFC), Citigroup Inc (NYSE:C), and UBS Group AG (USA) (NYSE:UBS).
Most investors ignore the moves of hedge fund managers like Ken Fisher 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 37 months and outperformed the S&P 500 Index by 53 percentage points (see the details here).
#5 UBS Group AG (USA) (NYSE:UBS)
Shares held (as of September 30): 27.65 million
Total Value (as of September 30): $512.1 million
Percent of Portfolio (as of September 30): 1.07%
With a year-to-date return of 23.63%, UBS Group AG (USA) (NYSE:UBS) is one of the best performing stocks in the financial sector. The bank has largely moved on from its tax evasion inquiry probes of prior years and is now solidly profitable. While QE in Europe doesn’t help the bank’s return on equity in the short run, it helps the bank in the long run if Europe’s economy comes roaring back to life like the American economy has. Richard S. Pzena‘s Pzena Investment Management owned 12.76 million shares of UBS at the end of June. With a forward P/E of 12.3 and dividend yield of 2.63%, shares look reasonably priced.
#4 Citigroup Inc (NYSE:C)
Shares held (as of September 30): 11.89 million
Total Value (as of September 30): $589.91 million
Percent of Portfolio (as of September 30): 1.23%
Because Citigroup Inc (NYSE:C) is more international than its peers, the rising dollar hurts the bank more, as it diminishes Citigroup’s overseas earnings. Given the cheap valuation of 0.78-times book value and the eventual normalization of interest rates, shares are worth the trouble, however. Citigroup will do well in the long run as it begins returning its excess earnings to shareholders through buybacks and dividends. It has come a long way from the financial crisis, and will steadily improve over time. Seth Klarman’s Baupost Group owned 102.55 million Citigroup shares at the end of June.
#3 Berkshire Hathaway Inc. (NYSE:BRK.B)
Shares held (as of September 30): 5.52 million
Total Value (as of September 30): $720.01 million
Percent of Portfolio (as of September 30): 1.50%
Berkshire Hathaway Inc. (NYSE:BRK.B) shares might be down by 8.5% year-to-date, but Warren Buffett still has the magic touch as evidenced by the big Kraft-Heinz deal that will likely produce billions in profits for Berkshire. The deal follows Buffett’s deals with numerous other Fortune 500 companies where Buffett lends his name and support to companies and gets a low-risk, high-reward deal in return. Although Berkshire isn’t guaranteed to beat the market every year like it once did, owning the stock is still a good bet in the long run. Many of Berkshire Hathaway’s divisions have wide moats and pricing power.
Ken Fisher’s top two finance stock picks are on the following page.
#2 JPMorgan Chase & Co. (NYSE:JPM)
Shares held (as of September 30): 13.82 million
Total Value (as of September 30): $842.68 million
Percent of Portfolio (as of September 30): 1.76%
Although JPMorgan Chase & Co. (NYSE:JPM) had a tough trading quarter that led it to miss analyst EPS estimates for its most recent quarter, the bank’s shares are still up by 4.83% year-to-date. Under the leadership of the best CEO in the business, Jamie Dimon, JPMorgan Chase has a fortress balance sheet and earns a respectable return on capital. With a forward P/E of 10.23 and dividend yield of 2.76%, shares look cheap. Look for JPMorgan Chase’s stock to do well over the next five years as management buys back more stock and the bank’s tangible book increases. Paul Ruddock and Steve Heinz‘s Lansdowne Partners owned 21.16 million shares of the investment bank at the end of June.
#1 Wells Fargo & Co (NYSE:WFC)
Shares held (as of September 30): 18.81 million
Total Value (as of September 30): $965.82 million
Percent of Portfolio (as of September 30): 2.01%
At 2.01% of his portfolio, Wells Fargo & Co (NYSE:WFC) is Ken Fisher’s favorite finance holding. It isn’t surprising, as Wells Fargo is also Warren Buffett’s top holding at 24.67% of Buffett’s portfolio. Buffett likes Wells Fargo so much that he said during the depths of the financial crisis that he would to buy the entire bank if U.S laws allowed it. With a forward P/E of 12.35 and dividend yield of 2.74%, shares look cheap, especially once interest rates begin to normalize.