Bundling is a genius marketing and sales tactic that is employed by several industries to boost their revenues. For example consumers pay a slightly lower price if they buy fries and a drink together with their cheeseburgers. Your cable company doesn’t even offer subscriptions to individual channels. You have to subscribe to all 100+ TV channels if you’d like to get their cable TV service. This practice forces consumers to pay for TV channels that they may never watch.
Hedge funds use the same trick. Billionaire Larry Robbins had 48 stocks in his 13F portfolio at the beginning of this year. Obviously some of these are great ideas and some aren’t. Why would anyone want to pay Larry Robbins 2% of his/her capital and 20% of potential profits (but not losses) for his 48th best idea? This is crazy. Like cable TV viewers who really watch only a handful channels, Robbins’ investors would prefer investing in only his best ideas. At the beginning of this year, the five largest positions in Robbins’ portfolio were HCA Holdings Inc (NYSE:HCA), Humana Inc. (NYSE:HUM), Anthem Inc (NYSE:ANTM), Cigna Corporation (NYSE:CI), and Aetna Inc (NYSE:AET).
In this article we will talk about how investors can identify Larry Robbins’ best and worst ideas so that they can generate market beating returns without paying an arm and a leg for these stock picks. By the way, Larry Robbins will be sharing one of his best ideas at this year’s Ira Sohn Conference in New York City.
Investing in only the best ideas of hedge funds should deliver much higher returns on average than investing in ALL (good and bad) ideas of a single hedge fund manager. One of the most successful and richest hedge fund managers of all time is Steve Cohen. Cohen’s SAC Capital managed to return nearly 30% annually over a 20 year period by using a very simple trick. Steve Cohen employed dozens of portfolio managers in his fund. You can think of them as “independent hedge funds” within Cohen’s hedge fund. Portfolio managers are in complete charge of their own funds with the condition that they share their best ideas with Cohen. So, Steve Cohen was really like a hedge fund investor who has the luxury of investing in only the best ideas of more than a dozen hedge funds. This setup helped him beat the market by a huge margin and become one of the richest people on the planet.
Most hedge fund managers including Larry Robbins would rather invest in mediocre ideas instead of concentrated portfolios that contain only their best ideas for two reasons.
First, they manage too much money and it usually isn’t practical to invest billions (and tens of billions of dollars in the case of the largest hedge funds) in only a handful of stocks. There is simply too much interest in hedge funds at the moment. I talked about this issue in detail last month, you can read the details here.
Second, hedge fund managers know that sooner or later even their highest conviction ideas will perform much worse than the market and they may lose most of their investors when this happens. This is what happened to Bill Ackman in 2015 and 2016. At one point Ackman managed almost $20 billion, yet he invested in only about 10 stocks. His Valeant International (VRX) investment turned into a nightmare costing his investors $4 billion. Luckily most of Ackman’s investors aren’t as shallow as the financial journalists who went after him gloating these loses. Ackman survived the huge volume of publicity and still manages more than $10 billion.
We should note that we are still able to identify Ackman’s best and worst ideas in our analysis, but we will reveal the details of that analysis in another article. I am pretty certain that you will be surprised with the performance of Larry Robbins’ best stock picks which we will discuss next.
Glenview Capital was among the best performing hedge funds in 2012, 2013, and 2014. His fund returned 24.2% in 2012, 42.9% in 2013, and 14.4% in 2014. However, his recent performance isn’t encouraging. Robbins’ main fund lost 18.1% in 2015 and 2.7% in 2016.
You don’t have to be a math genius to notice that Glenview’s investors actually lost more than 2 percentage points annually in the last 3 years. What is shocking is that our analysis shows that Robbins’ best performing stock picks actually returned 4.33% per month on average over the last 3 years. S&P 500 ETF (SPY) returned only 0.5% per month during the same period.
You may be thinking that why we didn’t tell you about Robbins’ best stock picks 3 years ago before they started beating the market by nearly 4 percentage points per month. Actually, we did exactly that in the February 2014 issue of our monthly newsletter. Currently we offer a 14-day free subscription where you can download the latest issue of our monthly newsletter to read about the details of Larry Robbins’ best performing stock picks.
We discovered another profitable investment strategy while studying the historical performance of Robbins’ stock picks 3 years ago. Our analysis showed at the time that Glenview’s large-cap stock picks outperformed the S&P 500 Total Return Index by about 5 percentage points a year between 2002 and 2012. Obviously this isn’t as spectacular as beating the market by nearly 4 percentage points per month, but this is still very rare.
Most investors think that they can’t outperform the market and they have been switching to low cost index funds in recent years. Well, if they invested in Larry Robbins’ large-cap stock picks over the last 3 years they would have generated an average monthly return of 0.84% vs. 0.76% gain for the S&P 500 Total Return Index. You should keep in mind that Robbins’ picks were less riskier than the stock picks of the S&P’s index committee. When adjusted for risk, Robbins’ large-cap stock picks generated an annual alpha of 3 percentage points.
Larry Robbins’ main hedge fund generated negative returns in the last 3 years, so it isn’t really the best time period to get an idea about the “real” performance of these stocks. If we look at the performance of these stocks since the beginning of 2008 we see that Robbins’ large-cap stock picks returned 1.1% per month vs. 0.68% per month for the S&P 500 TR Index.
This period, which includes the 2008-2009 financial crisis, is probably a better time period to analyze performance of hedge funds. Robbins’ large-cap picks beat the market by 5 percentage points in this period and even when almost everything was going against Robbins in the last three years, they still managed to beat the market. So, let’s take a closer look at the top 5 large-cap stock picks of Larry Robbins: HCA Holdings Inc (NYSE:HCA), Humana Inc. (NYSE:HUM), Anthem Inc (NYSE:ANTM), Cigna Corporation (NYSE:CI), Aetna Inc (NYSE:AET).
Our analysis didn’t cover the stock returns in 2017. When we look at the performance of Robbins’ top 5 large-cap stock picks, we see that they returned an average of 14.5% excluding dividends and outperformed the S&P 500 ETFs by about 8 percentage points in 4 short months.
This also tells us another important fact about quantitative investment strategies. We just don’t know when exactly they will outperform the market. We just know that they outperformed the market on average. Larry Robbins must have been frustrated with the performance of hospital and insurance stocks in 2015 and 2016. Four out of his top 5 picks are large health insurance companies. When these stocks were underperforming instead of giving up on them he added to his holdings. For instance during the third quarter of 2016 he boosted his stake in Anthem Inc by 41%, HCA Holdings Inc by 10%, and Humana Inc by 10%. He continued to add to his HCA Holdings Inc and Anthem Inc positions during Q4 as well. Out of these 5 stocks Anthem is the best performing stock in 2017, returning 23.7% excluding dividends.
We believe Larry Robbins’ large-cap stock picks will continue to generate above market returns on average and we don’t think investors should pay him 2% of their assets and 20% of their potential returns on order to invest in these stocks together with his other mediocre stock picks.
Larry Robbins’ Best Stock Picks
You can generate decent returns by investing in Larry Robbins’ top large-cap stock picks like HCA Holdings Inc (NYSE:HCA), Humana Inc. (NYSE:HUM), Anthem Inc (NYSE:ANTM), Cigna Corporation (NYSE:CI), Aetna Inc (NYSE:AET). However, you would have outperformed the market by nearly 4 PERCENTAGE POINTS PER MONTH by investing in his best stock picks. You can find out the latest list of these stocks by signing up today. Currently we are running a 2-day promotion where you can get $200 off if you subscribe to our both newsletters. Sign up NOW!
