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Harvard Management Company’s Stock Picks Trail the Broader Market

Harvard Management Company is an asset management firm operated by Harvard University to manage its over $37 billion endowment. Since 2015, the firm has been headed by Stephen Blyth, who has been working at Harvard Management Company since 2006. Apart from being the CEO and president of Harvard Management Company, Mr. Blyth also teaches quantitative finance at Harvard University. According to the firm’s last submitted 13F filing, its US equity portfolio at the end of December was worth $1.03 billion or less than 3% money it oversees and consisted of 158 open equity positions. To know how well the firm’s stock picks are performing in 2016, we at Insider Monkey did an analysis of Harvard Management Company’s 13F holdings in companies worth at least $1 billion and found that the 80 long positions held by the fund delivered a weighted average loss of 0.8% in the first quarter of 2016, which was slightly below the returns generated by the broader market during the same period. In this article, we are going to analyze the performance of its top two holdings while entering 2016 along with the performance of three companies in which it made interesting moves during the fourth quarter.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

Jane Mendillo
Jane Mendillo
Harvard Management Co

First, let’s discuss Chinese search giant Baidu Inc (ADR) (NASDAQ:BIDU), in which Harvard Management Company initiated a stake during the fourth quarter by purchasing 88,078 shares. Another fund that initiated a stake in Baidu Inc (ADR) (NASDAQ:BIDU) during the same period was Jonathan Auerbach‘s Hound Partners, which bought 1.07 million shares of the company. Amid a slump in Chinese equities at the beginning of 2016, Baidu Inc (ADR) (NASDAQ:BIDU)’s stock also plummeted. However, it managed a swift recovery during the second-half of the first quarter and ended the quarter with marginal gains. Last month, the Wall Street Journal reported that the company will be testing its driverless cars in the US and plans to launch a commercially viable model by 2018. The company is expected to report its first-quarter results by the end of this month and the consensus among analysts is for it to report EPS of $6.24 on revenue of $15.76 billion. For the same quarter of the previous financial year, Baidu Inc had reported EPS of $6.76 on revenue of $12.72 billion.

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Harvard Management Company cut its stake in the oilfield services company Baker Hughes Incorporated (NYSE:BHI) nearly by half to 415,423 shares during the fourth quarter. Shares of Baker Hughes Incorporated (NYSE:BHI) ended the first quarter down by 4.6% and are currently trading nearly 9% in red year-to-date. Iconic energy investor T Boone Pickens‘ BP Capital was among the hedge funds that initiated a stake in Baker Hughes Incorporated (NYSE:BHI) during the fourth quarter; it purchased 96,036 shares of the company during that period. On April 6, merely a few days after the company along with Halliburton Company (NYSE:HAL) announced that their respective shareholders have approved their merger, the U.S. Justice Department filed a civil lawsuit to block the $35 billion merger between the two companies. On April 7, analysts at FBR & Co. released a note to their clients asking them to continue being long Baker Hughes Incorporated because, even if the merger fails, Halliburton Company will have to pay $3.5 billion to Baker Hughes Incorporated as a break-up fee, which the latter can use for its restructuring initiatives.

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Harvard Management Company went bullish on Alibaba Group Holding Ltd (NYSE:BABA) during the fourth quarter, increasing its stake by 1,821% to 307,210 shares. Another fund that also boosted its exposure to the company during the same period was Dmitry Balyasny‘s Balyasny Asset Management, which increased its holding by 1,214% to almost 1.3 million shares. Owing to the 30% rally it saw during the second-half of the first quarter, Alibaba Group Holding Ltd (NYSE:BABA)’s stock managed to end the first quarter with a marginal loss of 2.75%. On April 5, the company completed its $4.2 billion acquisition of Chinese video site Youku Tudou and on April 12, it announced that it has agreed to buy a controlling stake in Southeast-Asian online retailer Lazada in a deal worth almost $1 billion. Alibaba Group Holding Ltd (NYSE:BABA) also has recently announced that it became the largest retailer in the world as measured by gross merchandise volume (GMV) at the end of its fiscal year ended March 31. Though the company is yet to release its fourth quarter and full year numbers, its announcement makes it clear that it surpassed $482.1 billion in GMV that Wal-Mart (NYSE:WMT) announced for its last fiscal year.

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Moving on, Howard Hughes Corp (NYSE:HHC) represented Harvard Management Company’s second-largest equity holding at the beginning of 2016, the position containing 428,603 shares. Kenneth Squire‘s 13D Management boosted its holding in the company by 375% to 159,922 shares during the same period. Shares of the real estate company have lost nearly 35% of their value in the past one year and ended the first quarter with declines of nearly 6.5%. On April 8, the company issued a press release announcing the departure of its CFO, Andrew Richardson, later this year and stating that a search for his successor is underway. For its fiscal 2016 first quarter, analysts expect the company to report EPS of $0.62 on revenue of $217.82 million, considerably above the EPS of $0.03 on revenue of $155.09 million it delivered a year earlier.

Though Harvard Management Company had reduced its stake in the company by 47% to 2.16 million shares during the fourth quarter, XPO Logistics Inc (NYSE:XPO) still remained its top stock pick at the beginning of the year. The fund trailed William B. Gray‘s Orbis Investment Management, which owned almost 16 million shares of XPO Logistics Inc (NYSE:XPO), as the company’s largest shareholder at the end of December among the funds in our database. XPO Logistics Inc (NYSE:XPO)’s stock saw an over 20% rise last month, which helped it in ending the first quarter with gains of 12.66%. Despite the recent rally, most analysts feel that the stock can soar even more from here because the margins of the company are expected to increase drastically over the next few quarters and owing to the acquisitions that it has done in the past its EPS is expected to grow in triple digits over the next two years. The 17 leading analysts and research houses on the Street that track the stock currently have an average rating of ‘Buy’ and an average price target of $38.53.

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Disclosure: None