What Hedge Funds Think of Other Investment Managers

Most hedge funds don’t make as much money as they did in the 1990’s and the first half of the previous decade, where alpha in excess of 10% was the norm. So, while investing in hedge funds might not be nearly as profitable as it once was, especially taking into account many firms’ high fees, the collective picks of these investment managers can still provide valuable insight into which stocks are likely to outperform their peers. This is why, in this article, we will take a look into what the more than 765 funds that we track think of other investment firms that trade on U.S exchanges and uncover how much support these stocks have from them.

Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see the details here).

Blackstone Group LP (NYSE:BX)

The Blackstone Group LP (NYSE:BX) was in the portfolio of 29 hedge funds in our database at the end of March, including Robert Joseph Caruso’s Select Equity Group, which owned 7.21 million shares, and John W. Rogers’ Ariel Investments, with ownership of 1.49 million shares.

Shares of Blackstone Group LP (NYSE:BX) have lost 5.45% in the second quarter and are down by 9.3% year-to-date. On Thursday, Bloomberg reported that the company had agreed to sell the Hyatt Regency Waikiki Beach Resort and Spa to Mirae Asset Global Investments for $780 million. As per the media outlet, the sale price implies a profit of more than $200 million for Blackstone in just three years.

Invesco Ltd. (NYSE:IVZ)

Among the funds that we track, 30 held long positions in Invesco Ltd. (NYSE:IVZ) at the end of the first quarter, owning 3.2% of the stock’s float. Large investors included Richard S. Pzena’s Pzena Investment Management, which boosted its stake by 55% during the first quarter, to 2.07 million shares, and John Brennan’s Sirios Capital Management, which initiated a position of 1.53 million shares during the quarter.

Shares of Invesco Ltd. (NYSE:IVZ) fell by 8.09% over the first three months of this year, and have continued to tumble in the second quarter, by another 5.52%. One of the main drivers of the decline in the second quarter were top and bottom-line misses in the company’s first quarter financial results, which were released on April 28. EPS of $0.49 and revenue of $818.1 million for the quarter missed estimates by $0.05 and $35.24 million, respectively. That led to a couple of analyst downgrades, which have put further strain on the stock.

We’ll check out the three investment management firms that are the most favored by their elite peers on the next page.

Ameriprise Financial, Inc. (NYSE:AMP)

Next up is Ameriprise Financial, Inc. (NYSE:AMP), which counted 31 hedge fund supporters in our database at the end of the first quarter, down from 36 quarter-over-quarter. While positions were relatively small, accounting for only 2.7% of the company’s float in aggregate, Legg Mason Capital Management, now a part of ClearBridge, initiated a stake in the company during the quarter comprised of 765,307 shares. Also invested in the firm were D. E. Shaw, owning 711,408 shares, and David Harding’s Winton Capital Management, holding 567,816 shares.

Ameriprise Financial, Inc. (NYSE:AMP) has also had a rough year, with its stock down by 5.3% year-to-date. However, over the second quarter, it has gained more than 7% on the back of the Department of Labor’s new retirement rules.

Franklin Resources, Inc. (NYSE:BEN)

Next up is Franklin Resources, Inc. (NYSE:BEN), in which 31 hedge funds in our database were long on March 31. Their combined stakes were worth more than $1.9 billion and accounted for 8.2% of the company’s shares. Once again, Pzena Investment Management was among the largest shareholders of record, with 10.59 million shares, while Jonathon Jacobson’s Highfields Capital Management owned 11.04 million shares.

Franklin Resources, Inc. (NYSE:BEN) is down by almost 12% year-to-date, largely driven by a double miss with its fiscal second quarter results. EPS of $0.61 missed estimates by $0.03, while revenue of $1.61 billion fell $40 million short of expectations. UBS downgraded the stock shortly after, claiming that the company relies on “just a handful of strategies to drive growth.”

Legg Mason Inc (NYSE:LM)

Lastly is Legg Mason Inc (NYSE:LM), which ranked as the most popular stock among the funds in our database, with 33 of them long the stock at the end of the first quarter of 2016. Their combined stakes accounted for more than 25% of the company’s shares as of March 31, making them overweight the stock. Among notable hedge fund shareholders were Nelson Peltz’s Trian Fund Management, which held the largest position as of the end of March, comprising 11.03 million shares, and Robert Rodriguez and Steven Romick’s First Pacific Advisors, which doubled its holding during the first quarter to 4.01 million shares.

Shares of Legg Mason Inc (NYSE:LM) lost 5.49% over the first quarter and have tumbled by a further 1.4% since April 1. Earlier this week, long-time Board Director Carol A. “John” Davidson initiated a new stake of 3,000 shares in the company. Though not large, the position is relevant in the sense that, after two years with the company, Mr. Davidson just now started a position, suggesting he feels it’s an optimal time to buy the stock.

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