Were Hedge Funds Right About Piling Into Morgan Stanley (MS)?

We at Insider Monkey have gone over 821 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 March 31st, near the height of the coronavirus market crash. We are almost done with the second quarter. Investors decided to bet on the economic recovery and a stock market rebound. S&P 500 Index returned almost 20% this quarter. In this article we look at how hedge funds traded Morgan Stanley (NYSE:MS) and determine whether the smart money was really smart about this stock.

Morgan Stanley (NYSE:MS) investors should be aware of an increase in hedge fund sentiment of late. MS was in 70 hedge funds’ portfolios at the end of March. There were 60 hedge funds in our database with MS positions at the end of the previous quarter. Our calculations also showed that MS isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

According to most shareholders, hedge funds are seen as worthless, outdated financial tools of yesteryear. While there are greater than 8000 funds with their doors open at present, Our experts look at the masters of this group, around 850 funds. It is estimated that this group of investors handle the lion’s share of the smart money’s total asset base, and by paying attention to their unrivaled stock picks, Insider Monkey has spotted various investment strategies that have historically outstripped Mr. Market. Insider Monkey’s flagship short hedge fund strategy defeated the S&P 500 short ETFs by around 20 percentage points per annum since its inception in March 2017. Our portfolio of short stocks lost 36% since February 2017 (through May 18th) even though the market was up 30% during the same period. We just shared a list of 8 short targets in our latest quarterly update .


Jeffrey Ubben of ValueAct Capital

At Insider Monkey we scour multiple sources to uncover the next great investment idea. There is a lot of volatility in the markets and this presents amazing investment opportunities from time to time. For example, this trader claims to deliver juiced up returns with one trade a week, so we are checking out his highest conviction idea. A second trader claims to score lucrative profits by utilizing a “weekend trading strategy”, so we look into his strategy’s picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. We recently recommended several stocks partly inspired by legendary Bill Miller’s investor letter. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. With all of this in mind let’s review the new hedge fund action encompassing Morgan Stanley (NYSE:MS).

Hedge fund activity in Morgan Stanley (NYSE:MS)

At the end of the first quarter, a total of 70 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 17% from the fourth quarter of 2019. By comparison, 54 hedge funds held shares or bullish call options in MS a year ago. With hedgies’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were increasing their stakes meaningfully (or already accumulated large positions).

Among these funds, Eagle Capital Management held the most valuable stake in Morgan Stanley (NYSE:MS), which was worth $515.6 million at the end of the third quarter. On the second spot was ValueAct Capital which amassed $484.5 million worth of shares. Arrowstreet Capital, Pzena Investment Management, and Diamond Hill Capital 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 Kettle Hill Capital Management allocated the biggest weight to Morgan Stanley (NYSE:MS), around 8.84% of its 13F portfolio. Springhouse Capital Management is also relatively very bullish on the stock, designating 7.23 percent of its 13F equity portfolio to MS.

Consequently, some big names were leading the bulls’ herd. Greenhaven Associates, managed by Edgar Wachenheim, assembled the most valuable position in Morgan Stanley (NYSE:MS). Greenhaven Associates had $99.1 million invested in the company at the end of the quarter. Robert Pohly’s Samlyn Capital also initiated a $57.4 million position during the quarter. The other funds with brand new MS positions are Louis Bacon’s Moore Global Investments, John Overdeck and David Siegel’s Two Sigma Advisors, and Andrew Kurita’s Kettle Hill Capital Management.

Let’s now review hedge fund activity in other stocks similar to Morgan Stanley (NYSE:MS). These stocks are Northrop Grumman Corporation (NYSE:NOC), VMware, Inc. (NYSE:VMW), Chubb Limited (NYSE:CB), and The Bank of Nova Scotia (NYSE:BNS). This group of stocks’ market caps resemble MS’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
NOC 45 984213 1
VMW 27 420625 -6
CB 33 691382 9
BNS 12 240173 -4
Average 29.25 584098 0

View table here if you experience formatting issues.

As you can see these stocks had an average of 29.25 hedge funds with bullish positions and the average amount invested in these stocks was $584 million. That figure was $3116 million in MS’s case. Northrop Grumman Corporation (NYSE:NOC) is the most popular stock in this table. On the other hand The Bank of Nova Scotia (NYSE:BNS) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Morgan Stanley (NYSE:MS) is more popular among hedge funds. 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 returned 13.3% in 2020 through June 25th but still managed to beat the market by 16.8 percentage points. Hedge funds were also right about betting on MS as the stock returned 44.8% so far in Q2 (through June 25th) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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