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Did Hedge Funds Drop The Ball On National Grid plc (NGG)?

Abigail Fisher

"Market conditions are changing. The continued rise in interest rates suggests we are in the early stages of a bond bear market, which could intensify as central banks withdraw liquidity. The receding tide of liquidity will start to reveal more rocks beyond what has been exposed in emerging markets so far, and the value of a value discipline will be in avoiding the biggest capital-destroying rocks. If a rock emerges on the crowded shore of U.S. momentum, it could result in a major liquidity challenge, as momentum is often most intense on the downside as a crowded trade reverses. So investors are facing a large potential trade-off right now: continue to bet on the current dominance of momentum and the S&P 500, or bet on change and take an active value bet in names with attractive value and optionality, but with negative momentum," said Clearbridge Investments in its market commentary. We aren't sure whether long-term interest rates will top 5% and value stocks outperform growth, but we follow hedge fund investor letters to understand where the markets and stocks might be going. This article will lay out and discuss the hedge fund and institutional investor sentiment towards National Grid plc (NYSE:NGG).

Is National Grid plc (NYSE:NGG) a first-rate investment now? Prominent investors are reducing their bets on the stock. The number of long hedge fund bets were trimmed by 1 recently. Our calculations also showed that NGG isn't among the 30 most popular stocks among hedge funds. NGG was in 10 hedge funds' portfolios at the end of December. There were 11 hedge funds in our database with NGG positions at the end of the previous quarter.

Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices. 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 market by 32 percentage points since May 2014 through March 12, 2019 (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.

Ken Griffin CITADEL INVESTMENT GROUP

We're going to take a look at the new hedge fund action regarding National Grid plc (NYSE:NGG).

How have hedgies been trading National Grid plc (NYSE:NGG)?

Heading into the first quarter of 2019, a total of 10 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -9% from the second quarter of 2018. By comparison, 9 hedge funds held shares or bullish call options in NGG a year ago. So, let's examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

NGG_mar2019

Among these funds, Renaissance Technologies held the most valuable stake in National Grid plc (NYSE:NGG), which was worth $224.6 million at the end of the third quarter. On the second spot was Arrowstreet Capital which amassed $81.2 million worth of shares. Moreover, Weld Capital Management, Citadel Investment Group, and HBK Investments were also bullish on National Grid plc (NYSE:NGG), allocating a large percentage of their portfolios to this stock.

Judging by the fact that National Grid plc (NYSE:NGG) has witnessed bearish sentiment from the aggregate hedge fund industry, we can see that there were a few fund managers who sold off their positions entirely last quarter. It's worth mentioning that Ken Griffin's Citadel Investment Group dropped the largest stake of the 700 funds watched by Insider Monkey, comprising close to $4 million in stock. Mike Vranos's fund, Ellington, also said goodbye to its stock, about $0.8 million worth. These transactions are important to note, as total hedge fund interest fell by 1 funds last quarter.

Let's check out hedge fund activity in other stocks similar to National Grid plc (NYSE:NGG). These stocks are TransCanada Corporation (NYSE:TRP), SYSCO Corporation (NYSE:SYY), Nokia Corporation (NYSE:NOK), and Barclays PLC (NYSE:BCS). This group of stocks' market values match NGG's market value.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position TRP,15,219002,1 SYY,34,2614998,3 NOK,27,613833,8 BCS,10,228838,-1 Average,21.5,919168,2.75 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 21.5 hedge funds with bullish positions and the average amount invested in these stocks was $919 million. That figure was $311 million in NGG's case. SYSCO Corporation (NYSE:SYY) is the most popular stock in this table. On the other hand Barclays PLC (NYSE:BCS) is the least popular one with only 10 bullish hedge fund positions. Compared to these stocks National Grid plc (NYSE:NGG) is even less popular than BCS. Clearly hedge funds dropped the ball on NGG as the stock performed well in 2019. Our calculations showed that top 15 most popular stocks among hedge funds returned 19.7% through March 15th and outperformed the S&P 500 ETF (SPY) by 6.6 percentage points. Hedge funds were also right about betting on NGG as the stock returned 21.5% and outperformed the market as well.

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

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