Connecticut-based Bridgewater Associates is among the largest hedge funds in the world, with assets under management of $169 billion. Founded in 1973, Bridgewater and its founder, billionaire Ray Dalio, are well known for being a top performing firm and an industry innovator. Dalio, an MBA from Harvard business school, left the position of CEO at Bridgewater in 2012 and now serves as a mentor and co-CIO. 87% of the fund’s $12.83 billion public equity portfolio was invested in finance through the fund’s large positions in three index funds. We’ve previously covered the top tech picks as well as the top mining stock picks of Dalio as of March 31. This time we’ll take a look at his top small-cap stock picks, which our backtests for the period of 2006 to 2012 show have been tremendously successful. During this time, the holdings in Dalio’s public equity portfolio had overall average monthly returns of 0.76% compared to the 0.45% returns of the S&P 500. As impressive as that might be, it is nothing compared to the performance of his top five small-cap picks for the same period, which returned an average of 1.96% per month, with an average monthly alpha of 1.08%.
This is significant because like many wealthy investors, Dalio sinks the majority of his public equity, non-index capital (and by extension the capital of his investors) into large-cap stocks like Apple Inc. (NASDAQ:AAPL) and Johnson & Johnson (NYSE:JNJ), which collectively, haven’t generated nearly the same returns that his best small-cap ideas have. Why should investors pay hefty fees to have limited exposure to a fund’s best-performing picks, while the bulk of their exposure is to lesser-performing, large-cap stocks? This is why we focus solely on the best small-cap stock ideas of the best fund managers like Dalio. Through our research, we have found that collectively, hedge funds’ top small-cap picks perform just as Dalio’s do, easily outperforming their best large-cap stock picks. We launched our flagship strategy in August 2012 around this compelling research and it’s returned over 142% since then, easily besting the market by nearly 85 percentage points (see the details).
With that in mind, let’s take a closer look at the best small-cap picks of Dalio as of March 31, which are Joy Global Inc. (NYSE:JOY), Cree, Inc. (NASDAQ:CREE), and Urban Outfitters, Inc. (NASDAQ:URBN).
In Philadelphia-based clothing corporation Urban Outfitters, Inc. (NASDAQ:URBN), Bridgewater increased its stake by 542% to 181,748 shares with a value of $8.30 million. The stock has returned 2.25% year-to-date, with a rally in March and a sharp decline of 11.7% over the last month caused by a disappointing earnings report, earnings that were affected by expenses in Urban Outfitters’ online business. For the company’s second quarter results, expected to be posted on August 17, analysts expect earnings to be $0.49 per share, which would be a big improvement over the $0.25 reported for the first quarter. While Urban Outfitters is increasing its sales, its earnings are not necessarily following suit, with increased online sales being fingered as a prime culprit due to their lower margins. Citadel Investment Group, led by billionaire Ken Griffin also increased its stake in Urban Outfitters, Inc. (NASDAQ:URBN) immensely in the first quarter, by 3,600% to 3.32 million shares.