Out of thousands of stocks that are currently traded on the market, it is difficult to identify those that will really generate strong returns. Hedge funds and institutional investors spend millions of dollars on analysts with MBAs and PhDs, who are industry experts and well connected to other industry and media insiders on top of that. Individual investors can piggyback the hedge funds employing these talents and can benefit from their vast resources and knowledge in that way. We analyze quarterly 13F filings of nearly 750 hedge funds and, by looking at the smart money sentiment that surrounds a stock, we can determine whether it has the potential to beat the market over the long-term. Therefore, let’s take a closer look at what smart money thinks about Marsh & McLennan Companies, Inc. (NYSE:MMC).
Marsh & McLennan Companies, Inc. (NYSE:MMC) investors should be aware of a decrease in activity from the world's largest hedge funds lately. Our calculations also showed that MMC isn't among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings). Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 Russell 2000 ETFs by 40 percentage points since May 2014 (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. Even if you aren't comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.
[caption id="attachment_340081" align="aligncenter" width="450"] Phill Gross of Adage Capital Management[/caption]
Unlike the largest US hedge funds that are convinced Dow will soar past 40,000 or the world's most bearish hedge fund that's more convinced than ever that a crash is coming, our long-short investment strategy doesn't rely on bull or bear markets to deliver double digit returns. We only rely on the best performing hedge funds' buy/sell signals. Let's take a look at the new hedge fund action encompassing Marsh & McLennan Companies, Inc. (NYSE:MMC).
How have hedgies been trading Marsh & McLennan Companies, Inc. (NYSE:MMC)?
At the end of the third quarter, a total of 26 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -10% from one quarter earlier. By comparison, 29 hedge funds held shares or bullish call options in MMC a year ago. With hedge funds' capital changing hands, there exists an "upper tier" of notable hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).
Of the funds tracked by Insider Monkey, Polar Capital, managed by Brian Ashford-Russell and Tim Woolley, holds the biggest position in Marsh & McLennan Companies, Inc. (NYSE:MMC). Polar Capital has a $190.4 million position in the stock, comprising 1.7% of its 13F portfolio. Sitting at the No. 2 spot is Diamond Hill Capital, managed by Ric Dillon, which holds a $124 million position; the fund has 0.7% of its 13F portfolio invested in the stock. Some other members of the smart money that hold long positions comprise Tom Gayner's Markel Gayner Asset Management, Phill Gross and Robert Atchinson's Adage Capital Management and Cliff Asness's AQR Capital Management. In terms of the portfolio weights assigned to each position Bishop Rock Capital allocated the biggest weight to Marsh & McLennan Companies, Inc. (NYSE:MMC), around 4.58% of its portfolio. Polar Capital is also relatively very bullish on the stock, setting aside 1.71 percent of its 13F equity portfolio to MMC.
Due to the fact that Marsh & McLennan Companies, Inc. (NYSE:MMC) has experienced bearish sentiment from the smart money, we can see that there exists a select few funds who sold off their positions entirely heading into Q4. It's worth mentioning that Renaissance Technologies said goodbye to the biggest investment of the "upper crust" of funds followed by Insider Monkey, valued at about $41.2 million in stock, and John Brandmeyer's Cognios Capital was right behind this move, as the fund cut about $2.1 million worth. These moves are interesting, as aggregate hedge fund interest fell by 3 funds heading into Q4.
Let's now take a look at hedge fund activity in other stocks - not necessarily in the same industry as Marsh & McLennan Companies, Inc. (NYSE:MMC) but similarly valued. We will take a look at Illinois Tool Works Inc. (NYSE:ITW), Walgreens Boots Alliance Inc (NASDAQ:WBA), Suncor Energy Inc. (NYSE:SU), and America Movil SAB de CV (NYSE:AMX). This group of stocks' market caps are similar to MMC's market cap.
[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position ITW,28,335340,0 WBA,34,831418,-7 SU,37,1416790,5 AMX,9,188555,0 Average,27,693026,-0.5 [/table]
View table here if you experience formatting issues.
As you can see these stocks had an average of 27 hedge funds with bullish positions and the average amount invested in these stocks was $693 million. That figure was $580 million in MMC's case. Suncor Energy Inc. (NYSE:SU) is the most popular stock in this table. On the other hand America Movil SAB de CV (NYSE:AMX) is the least popular one with only 9 bullish hedge fund positions. Marsh & McLennan Companies, Inc. (NYSE:MMC) is not the least popular stock in this group but hedge fund interest is still below average. Our calculations showed that top 20 most popular stocks among hedge funds returned 37.4% in 2019 through the end of November and outperformed the S&P 500 ETF (SPY) by 9.9 percentage points. A small number of hedge funds were also right about betting on MMC, though not to the same extent, as the stock returned 8.5% during the first two months of the fourth quarter and outperformed the market.
Disclosure: None. This article was originally published at Insider Monkey.