How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don't always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding Affiliated Managers Group, Inc. (NYSE:AMG) and determine whether hedge funds had an edge regarding this stock.
Affiliated Managers Group, Inc. (NYSE:AMG) shares haven't seen a lot of action during the second quarter. Overall, hedge fund sentiment was unchanged. The stock was in 27 hedge funds' portfolios at the end of the second quarter of 2020. Our calculations also showed that AMG isn't among the 30 most popular stocks among hedge funds (click for Q2 rankings and see the video for a quick look at the top 5 stocks). The level and the change in hedge fund popularity aren't the only variables you need to analyze to decipher hedge funds' perspectives. A stock may witness a boost in popularity but it may still be less popular than similarly priced stocks. That's why at the end of this article we will examine companies such as Blackstone Mortgage Trust Inc (NYSE:BXMT), Carter's, Inc. (NYSE:CRI), and Allakos Inc. (NASDAQ:ALLK) to gather more data points. Our calculations also showed that AMG isn't among the 30 most popular stocks among hedge funds (click for Q2 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.
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 S&P 500 ETFs by 58 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.
Lei Zhang of Hillhouse Capital Management
At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, legal marijuana is one of the fastest growing industries right now, so we are checking out stock pitches like “the Starbucks of cannabis” to identify the next tenbagger. We go through lists like the 10 most profitable companies in the world to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website to get excerpts of these letters in your inbox. Now let's view the recent hedge fund action encompassing Affiliated Managers Group, Inc. (NYSE:AMG).
How have hedgies been trading Affiliated Managers Group, Inc. (NYSE:AMG)?
At the end of June, a total of 27 of the hedge funds tracked by Insider Monkey were long this stock, a change of 0% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards AMG over the last 20 quarters. With the smart money's capital changing hands, there exists a select group of noteworthy hedge fund managers who were increasing their holdings meaningfully (or already accumulated large positions).
The largest stake in Affiliated Managers Group, Inc. (NYSE:AMG) was held by Southeastern Asset Management, which reported holding $103.4 million worth of stock at the end of September. It was followed by Lyrical Asset Management with a $77.9 million position. Other investors bullish on the company included Ariel Investments, Arrowstreet Capital, and Hillhouse Capital Management. In terms of the portfolio weights assigned to each position Wallace Capital Management allocated the biggest weight to Affiliated Managers Group, Inc. (NYSE:AMG), around 2.63% of its 13F portfolio. Southeastern Asset Management is also relatively very bullish on the stock, earmarking 2.58 percent of its 13F equity portfolio to AMG.
Judging by the fact that Affiliated Managers Group, Inc. (NYSE:AMG) has experienced a decline in interest from hedge fund managers, we can see that there exists a select few fund managers that elected to cut their positions entirely by the end of the second quarter. It's worth mentioning that Stephen Mildenhall's Contrarius Investment Management dumped the biggest investment of all the hedgies monitored by Insider Monkey, totaling about $6.8 million in stock. Brandon Haley's fund, Holocene Advisors, also cut its stock, about $2.9 million worth. These bearish behaviors are intriguing to say the least, as total hedge fund interest stayed the same (this is a bearish signal in our experience).
Let's now review hedge fund activity in other stocks similar to Affiliated Managers Group, Inc. (NYSE:AMG). These stocks are Blackstone Mortgage Trust Inc (NYSE:BXMT), Carter's, Inc. (NYSE:CRI), Allakos Inc. (NASDAQ:ALLK), Rexnord Corp (NYSE:RXN), ASGN Incorporated (NYSE:ASGN), Companhia Brasileira de Distrib. (NYSE:CBD), and Appian Corporation (NASDAQ:APPN). All of these stocks' market caps resemble AMG's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position BXMT,24,160654,5 CRI,33,268651,10 ALLK,14,311817,2 RXN,27,348031,8 ASGN,13,73867,-6 CBD,6,19316,1 APPN,18,467607,1 Average,19.3,235706,3 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 19.3 hedge funds with bullish positions and the average amount invested in these stocks was $236 million. That figure was $355 million in AMG's case. Carter's, Inc. (NYSE:CRI) is the most popular stock in this table. On the other hand Companhia Brasileira de Distrib. (NYSE:CBD) is the least popular one with only 6 bullish hedge fund positions. Affiliated Managers Group, Inc. (NYSE:AMG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AMG is 65.2. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. 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 21.3% in 2020 through September 25th and beat the market by 17.7 percentage points. Unfortunately AMG wasn't nearly as popular as these 10 stocks and hedge funds that were betting on AMG were disappointed as the stock returned -13.2% 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.
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Disclosure: None. This article was originally published at Insider Monkey.