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Was The Smart Money Right About American International Group Inc (AIG)?

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·7 min read
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In this article we will check out the progression of hedge fund sentiment towards American International Group Inc (NYSE:AIG) and determine whether it is a good investment right now. We at Insider Monkey like to examine what billionaires and hedge funds think of a company before spending days of research on it. Given their 2 and 20 payment structure, hedge funds have more incentives and resources than the average investor. The funds have access to expert networks and get tips from industry insiders. They also employ numerous Ivy League graduates and MBAs. Like everyone else, hedge funds perform miserably at times, but their consensus picks have historically outperformed the market after risk adjustments.

American International Group Inc (NYSE:AIG) has seen a decrease in hedge fund sentiment in recent months. American International Group Inc (NYSE:AIG) was in 40 hedge funds' portfolios at the end of June. The all time high for this statistics is 101. There were 43 hedge funds in our database with AIG positions at the end of the first quarter. Our calculations also showed that AIG 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.

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 S&P 500 ETFs by more than 56 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. 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.

Ric Dillon Diamond Hill Capital
Ric Dillon Diamond Hill Capital

Ric Dillon of Diamond Hill Capital

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 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 take a look at the key hedge fund action encompassing American International Group Inc (NYSE:AIG).

How are hedge funds trading American International Group Inc (NYSE:AIG)?

At second quarter's end, a total of 40 of the hedge funds tracked by Insider Monkey were long this stock, a change of -7% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in AIG over the last 20 quarters. So, let's review which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Is AIG A Good Stock To Buy?
Is AIG A Good Stock To Buy?

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Pzena Investment Management, managed by Richard S. Pzena, holds the largest position in American International Group Inc (NYSE:AIG). Pzena Investment Management has a $563.9 million position in the stock, comprising 3.7% of its 13F portfolio. The second largest stake is held by Diamond Hill Capital, managed by Ric Dillon, which holds a $513 million position; 3% of its 13F portfolio is allocated to the stock. Remaining peers that hold long positions include Robert Rodriguez and Steven Romick's First Pacific Advisors LLC, Peter Rathjens, Bruce Clarke and John Campbell's Arrowstreet Capital and John Murphy's Levin Easterly Partners. In terms of the portfolio weights assigned to each position Meru Capital allocated the biggest weight to American International Group Inc (NYSE:AIG), around 11.12% of its 13F portfolio. First Pacific Advisors LLC is also relatively very bullish on the stock, designating 5.61 percent of its 13F equity portfolio to AIG.

Seeing as American International Group Inc (NYSE:AIG) has witnessed falling interest from the entirety of the hedge funds we track, we can see that there were a few money managers who were dropping their positions entirely in the second quarter. Intriguingly, Renaissance Technologies sold off the biggest investment of the "upper crust" of funds tracked by Insider Monkey, valued at an estimated $18.5 million in stock. Daniel Johnson's fund, Gillson Capital, also said goodbye to its stock, about $12.3 million worth. These transactions are interesting, as total hedge fund interest was cut by 3 funds in the second quarter.

Let's also examine hedge fund activity in other stocks similar to American International Group Inc (NYSE:AIG). We will take a look at Cadence Design Systems Inc (NASDAQ:CDNS), The Kroger Co. (NYSE:KR), Microchip Technology Incorporated (NASDAQ:MCHP), Lloyds Banking Group PLC (NYSE:LYG), Franco-Nevada Corporation (NYSE:FNV), Manulife Financial Corporation (NYSE:MFC), and AutoZone, Inc. (NYSE:AZO). This group of stocks' market caps are closest to AIG's market cap.

[table] Ticker, No of HFs with positions, Total Value of HF Positions (x1000), Change in HF Position CDNS,39,1090501,8 KR,41,2361525,-2 MCHP,33,890574,-5 LYG,7,14116,-2 FNV,23,1374566,2 MFC,19,171076,-1 AZO,55,2395499,10 Average,31,1185408,1.4 [/table]

View table here if you experience formatting issues.

As you can see these stocks had an average of 31 hedge funds with bullish positions and the average amount invested in these stocks was $1185 million. That figure was $2029 million in AIG's case. AutoZone, Inc. (NYSE:AZO) is the most popular stock in this table. On the other hand Lloyds Banking Group PLC (NYSE:LYG) is the least popular one with only 7 bullish hedge fund positions. American International Group Inc (NYSE:AIG) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for AIG is 48.3. 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 23% in 2020 through October 30th and beat the market again by 20.1 percentage points. Unfortunately AIG wasn't nearly as popular as these 10 stocks and hedge funds that were betting on AIG were disappointed as the stock returned 2.1% since the end of June (through 10/30) 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.

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