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Is Ryan Specialty Group Holdings (RYAN) A Smart Long-Term Buy?

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Cooper Investors, an investment management firm, published its “Cooper Investors Global Equities Fund (Hedged)” third quarter 2021 investor letter – a copy of which can be downloaded here. For the rolling three months to one year, the Fund returned 5.7% and 28.24% respectively, while its benchmark, by comparison, returned -0.42% and 26.57% over the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Cooper Investors, in its Q3 2021 investor letter, mentioned Ryan Specialty Group Holdings, Inc. (NYSE: RYAN) and discussed its stance on the firm. Ryan Specialty Group Holdings, Inc. is a Chicago, Illinois-based insurance company with a $4.1 billion market capitalization. RYAN delivered a 16.01% return for the past month and it closed at $36.93 per share on October 18, 2021.

Here is what Cooper Investors has to say about Ryan Specialty Group Holdings, Inc. in its Q3 2021 investor letter:

"In early August the Portfolio participated in the float of Ryan Specialty Group, a US-listed wholesale insurance broker.

A core tenet of our investment philosophy is the idea of Pattern Recognition. When we see the setup for an idea that has worked well previously it can often form the bedrock of an investment proposition – this may pertain to certain industries, business models, management behaviours or group maturity.

Ryan Specialty was founded a decade ago by current CEO Pat Ryan. What is remarkable about Pat is that in the early 1980s he also founded Aon, the world’s largest retail insurance broker and a long term Portfolio holding. He led Aon until 2008 as CEO and then Chairman. Pat was so confident in the opportunities in wholesale insurance broking that in 2010 two years after “retiring” he founded Ryan Specialty. He displays deep industry knowledge and remains an engaged leader despite his status as an octogenarian. He has also developed a deep management bench with most of the senior executive team being long term Ryan Specialty employees. He owns a little less than half the company today.

Insurance broking is an area we know well through long term investments in Aon and Arthur J Gallagher, retail brokers who use wholesale brokers like Ryan Specialty to place risk which cannot be underwritten by standard insurance contracts. This is known as the Excess & Surplus portion of the market. Ryan Specialty’s highly specialised wholesale brokers work with insurers to place risks that are often highly complex or unique and retail and wholesale share the commission paid by the insurer (though neither take on underwriting risk). E&S accounts for ~17% of the insurance market today and continues to grow in prominence as economies and businesses become more complex. Much like the aforementioned retail broking industry, the wholesale space is also consolidating and as an industry leader, Ryan Specialty have been able to supplement their organic growth via an attractive acquisition program."

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Based on our calculations, Ryan Specialty Group Holdings, Inc. (NYSE: RYAN) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. Ryan Specialty Group Holdings, Inc. (NYSE: RYAN) delivered a 6.54% return in the past 5 days.

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 115 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.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest-growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best EV stocks to pick the next Tesla that will deliver a 10x return. 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 homepage.

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