Were Hedge Funds Right About Aon plc (AON)?

We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming). In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. We at Insider Monkey have gone over 835 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of December 31st. In this article, we look at what those funds think of Aon plc (NYSE:AON) based on that data.

Aon plc (NYSE:AON) has seen an increase in hedge fund interest in recent months. AON was in 51 hedge funds’ portfolios at the end of the fourth quarter of 2019. There were 45 hedge funds in our database with AON positions at the end of the previous quarter. Our calculations also showed that AON isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).

So, why do we pay attention to hedge fund sentiment before making any investment decisions? Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 41 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Harold Levy Iridian Asset Management

Harold Levy of Iridian Asset Management

With all of this in mind we’re going to take a peek at the latest hedge fund action regarding Aon plc (NYSE:AON).

What have hedge funds been doing with Aon plc (NYSE:AON)?

At the end of the fourth quarter, a total of 51 of the hedge funds tracked by Insider Monkey were long this stock, a change of 13% from the previous quarter. The graph below displays the number of hedge funds with bullish position in AON over the last 18 quarters. So, let’s review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Eagle Capital Management held the most valuable stake in Aon plc (NYSE:AON), which was worth $837.9 million at the end of the third quarter. On the second spot was Cantillon Capital Management which amassed $291.5 million worth of shares. Iridian Asset Management, First Pacific Advisors LLC, and Viking Global 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 Permian Investment Partners allocated the biggest weight to Aon plc (NYSE:AON), around 10.89% of its 13F portfolio. BloombergSen is also relatively very bullish on the stock, setting aside 7.92 percent of its 13F equity portfolio to AON.

With a general bullishness amongst the heavyweights, specific money managers have jumped into Aon plc (NYSE:AON) headfirst. Citadel Investment Group, managed by Ken Griffin, established the largest position in Aon plc (NYSE:AON). Citadel Investment Group had $73 million invested in the company at the end of the quarter. Michael Kharitonov and Jon David McAuliffe’s Voleon Capital also initiated a $44.8 million position during the quarter. The other funds with brand new AON positions are D. E. Shaw’s D E Shaw, Ray Dalio’s Bridgewater Associates, and Sander Gerber’s Hudson Bay Capital Management.

Let’s now review hedge fund activity in other stocks – not necessarily in the same industry as Aon plc (NYSE:AON) but similarly valued. We will take a look at Kinder Morgan Inc (NYSE:KMI), Capital One Financial Corp. (NYSE:COF), DuPont de Nemours Inc (NYSE:DD), and Kimberly Clark Corporation (NYSE:KMB). All of these stocks’ market caps resemble AON’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
KMI 40 1360313 2
COF 50 2041230 3
DD 68 2372175 16
KMB 37 1058671 -5
Average 48.75 1708097 4

View table here if you experience formatting issues.

As you can see these stocks had an average of 48.75 hedge funds with bullish positions and the average amount invested in these stocks was $1708 million. That figure was $2627 million in AON’s case. DuPont de Nemours Inc (NYSE:DD) is the most popular stock in this table. On the other hand Kimberly Clark Corporation (NYSE:KMB) is the least popular one with only 37 bullish hedge fund positions. Aon plc (NYSE:AON) is not the most popular stock in this group but hedge fund interest is still above average. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 1.0% in 2020 through May 1st but beat the market by 12.9 percentage points. Unfortunately AON wasn’t nearly as popular as these 10 stocks and hedge funds that were betting on AON were disappointed as the stock returned -14% during the same time period and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as many of these stocks already outperformed the market so far this year.
5 Most Popular Stocks Among Hedge Funds
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

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