Kahn Brothers, managed by Alan Kahn and Thomas Kahn managed to beat the market in the first quarter of 2015, a period during which the fund’s co-founder and longtime manager Irving Kahn passed away at the age of 109. Irving (pictured) was the oldest active investor on Wall Street at the time of his passing, working three times per week right into late 2014. Kahn Brothers’ 31 reported long positions in companies valued at $1 billion or greater entering the first quarter delivered weighted average returns of 2.1% based on those 13F filed positions (which may have changed over the course of the quarter).
We track funds like Kahn Brothers because our research has shown that the 15 most popular small-cap stocks among hedge funds beat the market by 95 basis points per month between 1999 and 2012. There aren’t a lot of investment strategies that can beat the market by 10 percentage points a year, so we launched our strategy and began tracking and sharing the performance of hedge fund’s 15 most popular small-cap picks since the end of August 2012. These stocks returned more than 137% since then through the end of March 2015 and dominated the S&P 500 ETF (SPY)’s 54.7% gain by more than 82 percentage points (read the details here).
Kahn Brothers’ achieved its performance in spite of big losses from two of its top picks, Citigroup Inc (NYSE:C) and BlackBerry Ltd (NASDAQ:BBRY), partially thanks to the performance of another of its top picks Pfizer Inc. (NYSE:PFE). Itstop pick was Citigroup Inc (NYSE:C), with the fund massively increasing its position in the investment bank by 869% during the fourth quarter. That brought its position to 1.19 million shares valued at $64.42 million. The big move has failed to pay short-term dividends however, despite Citigroup Inc (NYSE:C) passing the Federal Reserve’s stress test, which it failed last year. Passing the test now allows it to return capital to shareholders in the form of greater dividends and share buybacks, a development that Kahn Brothers may have been banking on. Citigroup’s top three shareholders in our database, which includes billionaires Andreas Halvorsen and Ken Fisher, all lowered their stakes during the fourth quarter, not showing the same confidence in it that Kahn Brothers did.
While Kahn Brothers had a much smaller position in BlackBerry Ltd (NASDAQ:BBRY) of 1.85 million shares valued at $20.27 million, it was equally disastrous given its extremely poor returns of -18.67% during the quarter. Prem Watsa, who also has a position in both Blackberry and Pfizer was unable to achieve the same results, as he was much more heavily invested in the Canadian technology company. That resulted in a weighted average returns quarterly loss of 8%, making Watsa’s Fairfax Financial Holdings the 11thworst performing fund of the first quarter.