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Hedge Funds Are Souring On RLI Corp. (RLI)

Based on the fact that hedge funds have collectively under-performed the market for several years, it would be easy to assume that their stock picks simply aren’t very good. However, our research shows this not to be the case. In fact, when it comes to their very top picks collectively, they show a strong ability to pick winning stocks. This year hedge funds’ top 20 stock picks easily bested the broader market, at 37.4% compared to 27.5%, despite there being a few duds in there like Berkshire Hathaway (even their collective wisdom isn’t perfect). The results show that there is plenty of merit to imitating the collective wisdom of top investors.

RLI Corp. (NYSE:RLI) investors should be aware of a decrease in activity from the world’s largest hedge funds in recent months. Our calculations also showed that RLI isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings).
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ large-cap stock picks indeed failed to beat the market between 1999 and 2016. However, we were able to identify in advance a select group of hedge fund holdings that outperformed the Russell 2000 ETFs by 40 percentage points since May 2014 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that’ll significantly underperform the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 27.8% through November 21, 2019. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to.

Tom Gayner

Tom Gayner of Markel Gayner Asset Management

We leave no stone unturned when looking for the next great investment idea. For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. One of the most bullish analysts in America just put his money where his mouth is. He says, “I’m investing more today than I did back in early 2009.” So we check out his pitch. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We also rely on the best performing hedge funds‘ buy/sell signals. We’re going to take a look at the new hedge fund action surrounding RLI Corp. (NYSE:RLI).

What have hedge funds been doing with RLI Corp. (NYSE:RLI)?

At the end of the third quarter, a total of 14 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from the second quarter of 2019. By comparison, 11 hedge funds held shares or bullish call options in RLI a year ago. With the smart money’s positions undergoing their usual ebb and flow, there exists a select group of notable hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).

More specifically, Markel Gayner Asset Management was the largest shareholder of RLI Corp. (NYSE:RLI), with a stake worth $111.2 million reported as of the end of September. Trailing Markel Gayner Asset Management was Polar Capital, which amassed a stake valued at $27.1 million. Royce & Associates, GLG Partners, and Citadel Investment Group were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Markel Gayner Asset Management allocated the biggest weight to RLI Corp. (NYSE:RLI), around 1.68% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, setting aside 0.25 percent of its 13F equity portfolio to RLI.

Seeing as RLI Corp. (NYSE:RLI) has faced declining sentiment from the entirety of the hedge funds we track, we can see that there exists a select few fund managers that elected to cut their positions entirely last quarter. Intriguingly, Paul Tudor Jones’s Tudor Investment Corp dumped the biggest position of the “upper crust” of funds monitored by Insider Monkey, totaling close to $0.2 million in stock. Matthew Hulsizer’s fund, PEAK6 Capital Management, also dumped its stock, about $0 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest dropped by 1 funds last quarter.

Let’s also examine hedge fund activity in other stocks – not necessarily in the same industry as RLI Corp. (NYSE:RLI) but similarly valued. These stocks are PNM Resources, Inc. (NYSE:PNM), The Brink’s Company (NYSE:BCO), Valvoline Inc. (NYSE:VVV), and EnLink Midstream LLC (NYSE:ENLC). This group of stocks’ market caps match RLI’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PNM 14 413235 1
BCO 20 515286 -7
VVV 26 333444 4
ENLC 12 38220 0
Average 18 325046 -0.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 18 hedge funds with bullish positions and the average amount invested in these stocks was $325 million. That figure was $184 million in RLI’s case. Valvoline Inc. (NYSE:VVV) is the most popular stock in this table. On the other hand EnLink Midstream LLC (NYSE:ENLC) is the least popular one with only 12 bullish hedge fund positions. RLI Corp. (NYSE:RLI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. Unfortunately RLI wasn’t nearly as popular as these 20 stocks (hedge fund sentiment was quite bearish); RLI investors were disappointed as the stock returned -0.4% during the first two months of the fourth quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as 70 percent of these stocks already outperformed the market in Q4.

Disclosure: None. This article was originally published at Insider Monkey.

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