Pzena Investment Management’s Top Five Picks for Start of 2016

Pzena Investment Management is a New York City-based hedge fund focused on classic value investing, founded by Richard S. Pzena in 1996. As of the end of January of 2016, the firm had $24.5 billion in assets under management (AUM). Recently, the firm has filed its 13F for the fourth quarter of 2015, in which it revealed an equity portfolio worth $16.18 billion. As usual, the equity portfolio was pretty focused on financial stocks, which amassed around 39% of the total value. In this article, we are going to take a look at the fund’s top picks as of December 31, 2015.

Out of thousands of stocks that are trading on the market every day, it can be difficult sometimes to pick the right investment that can deliver market-beating returns. Here’s where our research comes in. By analyzing the equity portfolios of 700+ top investors, we can see what stocks they are collectively bullish on and use this data to compile a portfolio that can outperform the market. We have determined through this process that the best strategy is to follow the 15 most popular small-cap picks among hedge funds, which have delivered an alpha of around 81 basis points per month in our backtests covering the period between 1999 and 2012 (see more details).

#5 Royal Dutch Shell plc (ADR) (NYSE:RDS.A)

– Shares Owned by Pzena Investment Management (Q4): 9,969,381

– Value of Holding (Q4): $ 456.50 million

Royal Dutch Shell plc (ADR) (NYSE:RDS.A) climbed two spots in Pzena’s 13F during the fourth quarter, making it the fifth position in terms of value. Royal Dutch Shell plc (ADR) (NYSE:RDS.A) did not deliver strong results over the October-December period as depressed oil prices led the company to report earnings of $0.58 per share, below consensus estimate of $0.60 per share. Despite the poor results, it was not only Pzena that was betting on Shell. Another investor bullish on Royal Dutch Shell is billionaire Jim Simons’ Renaissance Technologies, which reported 692,937 shares in its 13F filing for the end of the fourth quarter.

#4 American International Group Inc (NYSE:AIG)

– Shares Owned by Pzena Investment Management (Q4): 7,578,036

– Value of Holding (Q4): $ 469.61 million

American International Group Inc (NYSE:AIG) fell one place in the list compared to the previous quarter, as the fund trimmed its stake by 7% amid a 9% growth registered by the stock during the fourth quarter. For the fourth quarter of 2016, AIG reported a net loss of $1.10 per share, missing the estimates of $0.93. At the same time, the company has recently reached an agreement with two activists, Carl Icahn and John Paulson, and in May will add Samuel Merksamer, managing director of Icahn Capital, and John Paulson to its board of directors. In their last 13F filings, Carl Icahn and John Paulson’s Paulson & Co. reported holding 1.36 million shares and 14.60 million shares of AIG, held as of the end of September. In addition, American International Group said its board of directors had authorized а $5.0 buyback program and announced plans to conduct an IPO of 19.9% of United Guaranty Corporation, AIG’s mortgage insurance unit.

On the next page we will look into Pzena Investment Mangement’s top 3 picks for the first quarter of 2016.

#3 Citigroup Inc (NYSE:C)

– Shares Owned by Pzena Investment Management (Q4): 9,076,626

– Value of Holding (Q4): $ 469,715,000

Citigroup Inc (NYSE:C) ascended one spot in Pzena’s list over the fourth quarter (even though the firm trimmed its stake in the company by 2%) driven by a 4.31% increase in the stock’s price. For the fourth quarter of 2015, Citigroup posted adjusted EPS of $1.06 on revenue of $18.64 billion, which was better than the $1.05 in EPS and $17.87 billion in revenue that analysts had expected. Among the funds that we track, Ken Fisher’s Fisher Asset Management is one of the top shareholders of Citigroup Inc (NYSE:C). As of the end of the fourth quarter of 2015, Fisher Asset Management disclosed ownership of 12.03 million shares of the banking company, worth more than $622 million. Harris Associates was, once again, among the largest institutional investors of record, with 26.51 million shares held as of December 31.

#2 Exxon Mobil Corporation (NYSE:XOM)

– Shares Owned by Pzena Investment Management (Q4): 6,072,604

– Value of Holding (Q4): $ 473,359,000

In the second place was Exxon Mobil Corporation (NYSE:XOM). Even though the stock was affected by a plunge in oil prices, the 12% decline over the past year is better than the drops registered by many of its peers. Exxon is much better positioned to deal with weak oil prices than its peers and despite concerns over its capability to pay dividends, the company has recenty announced a dividend of $0.73 per share for the first quarter of 2015. However, analysts are still concerned that in the current environment, if Exxon maintains the same dividend, the payout ratio might exceed 100% and the dividend payments might be higher than the company’s net income, for the first time in over 30 years. Since the beginning of the year, Exxon’s stock has inched up by 2% even though the company posted a net income of $0.67 per share for the fourth quarter, down from $1.56 posted a year earlier, but above the estimates of $0.63. At the same time, as the profit was the lowest in a decade, Exxon decided to slash its spending this year and said it is going to suspend the stock buybacks. Donald Yacktman’s Yacktman Asset Management reduced its exposure to Exxon Mobil Corporation (NYSE:XOM) by 27% during the fourth quarter, taking its holdings to 4.26 million shares.

#1 Bank of America Corp (NYSE:BAC)

– Shares Owned by Pzena Investment Management (Q4): 28,668,804

– Value of Holding (Q4): $ 482,496,000

Bank of America Corp (NYSE:BAC) was Pzena’s top pick for the first quarter of 2016. Even though the firm cut its stake in the company by 4% over the fourth quarter of 2015, the position was still the most valuable in the fund’s portfolio – aided by an 8.02% growth registered by the stock during the quarter. For the fourth quarter of 2015, Bank of America Corp (NYSE:BAC) posted earnings of $0.28 per share, $0.01 above the Street’s consensus, on revenue of $19.759 billion, which fell a bit short of expectations for $20.292 billion in sales. Fisher Asset Management was also quite bullish on the stock and disclosed holding more than 43 million shares (worth over $725 million) in its 13F filing for the fourth quarter.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.