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Zebra Capital Management’s Top Stock Picks

Sieni Kimalainen

Zebra Capital Management was launched back in 2001 by Roger Ibbotson, who is also the fund’s CIO and current Chairman. Mr Ibbotson is Professor Emeritus of Finance at Yale University whose research career was focused on uncommon behavioral finance derived investment approach, or, how people chose one financial option over another. Throughout his career he won many recognitions and awards, such as the Harry Markovitz Award for the best paper in the Journal Investment Management in 2015. Apart from his research career, and prior to founding Zebra Capital Management, he also gained first-hand trading experience working as Chairman of Ibbotson Associates and Ibbotson Associates Advisors until 2006, when the firm was purchased by Morningstar Inc. From 2006 to 2016, Mr Ibbotson was advisor at Morningstar Inc.

As for Zebra Capital Management, Mr Ibbotson decided to employ two strategies, Beta Neutral, and Long Only strategies. These strategies are employed through Zebra Global Equity Fund, Zebra Japanese Equity All Cap, Zebra US Micro Cap Equity, Zebra US Small Cap Equity, and Zebra Global Equity Advantage. The fund focuses on targeting less popular stocks with strong essential features.

Even though the fund relies on two different strategy approaches, it seems that they were not the most profitable choice for the previous period. In 2014 the fund did return a solid 6.8%, performing even better the following year, bringing back 10.5%. However, the next period proved to be a bad one. In 2016 the find lost 0.1%, 2.93% in 2017 and 2.91% in 2018. Year to date, through June 2019, the fund at least performed positively, reporting a figure of 0.7%. With an annual return of 4.06% the Zebra Capital Management seems to be struggling with the strategies it employs.

Roger Ibbotson Zebra Capital

Insider Monkey’s mission is to identify promising (and also terrible) hedge fund stock pitches and share them with our subscribers. We leave no stone unturned when looking for the next great investment idea. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. This December, we recommended Adams Energy as a one-way bet based on an under-the-radar fund manager’s investor letter and the stock is still extremely cheap despite already gaining 25 percent. Earlier this week we explained in an email to our free subscribers why Deswell Industries (DSWL) is deeply undervalued and the stock gained 10%. You can subscribe to our e-newsletters below to get these emails before the rest of the market.

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Our short strategy is based on shorting hedge fund hotels that are likely to experience large hedge fund sales during market weaknesses. We launched this strategy in February 2017. It’s been almost 3 years and the stock picks of this strategy lost a cumulative 27.8% vs. a cumulative gain of 39% for the S&P 500 ETF. This is an absolutely mind blowing performance. The annualized return of our short picks is -9.3%, vs. 12.7% annualized gain for the S&P 500 Index during the same period. The annual alpha of this strategy is 22 percentage points. Jim Chanos doesn’t generate this kind of performance. The best thing about this short strategy is that it provides an excellent hedge during market meltdowns. For example, in Q4 of 2018 when the S&P 500 Index lost nearly 14%, this strategy’s picks lost 25% protecting our premium subscribers from large losses (see the details here).

Now let's take a look at Zebra Capital Management’s top stock picks.

The fifth most valuable position in Zebra Capital Management’s latest 13F fillings was PS Business Parks Inc (NYSE:PSB). This position was boosted by 7% since the previous quarter. A total of 17 hedge funds were investing in the company in Q3, which is a change of 21% compared to Q2. Among them, Winton Capital Management held the largest stake worth $37.9 million. Other hedge funds bullish on the stock were AQR Capital Management, GLG Partners, and Algert Coldiron Investors.

At the fourth place in Zebra Capital Management’s portfolio for Q2 was International Bancshares Corporation (NASDAQ:IBOC). Mr Ibbotson decided to give this company another chance, boosting the position by 20%, which brought it up from 90th place in the fund’s portfolio since Q1 2019. However, other investors do not seem very interested in the stock. A total of 16 hedge funds tracked by Insider Monkey were bullish on International Bancshares Corporation, a change of -16% compared to Q2. The company’s top shareholder was Millennium Management, which reported holding $52.1 million. Polaris Capital Management, Arrowstreet Capital, AQR Capital Management, and D E Shaw were among the other International Bancshares Corporation’s top investors.

Zebra Capital Management’s third top stock pick for Q3 2019 was Michaels Companies Inc (NASDAQ:MIK). The fund boosted the position by 37%. Zebra Capital Management was also the company’s sixth largest shareholder for this period. The fund reported holding 148,293 shares worth $1.4 million, comprising 1.6% of its portfolio. Apart from this one, another 20 hedge funds tracked by Insider Monkey were bullish on the stock, a change of -20% compared to Q2. The company’s top shareholder for this period was AQR Capital Management, which reported holding $35.4 million worth of stock. Arrowstreet Capital, Skylands Capital, and Gotham Asset Management were among Michaels Companies Inc ‘s top investors as well.

The fund’s second most valuable position for Q3 2019 was National General Holdings Corp (NASDAQ:NGHC), boosted by 15% in this period. A total of 17 hedge funds held long positions in the stock, which is 1 shareholder less compared to the previous quarter. Among them, Park West Asset Management was the company’s largest shareholder, with a stake worth $120.5 million. Other hedge funds fond of the company were MSDC Management, Nut Tree Capital, And AQR Capital Management.

At the first place in Zebra Capital Management’s portfolio for Q3 was AVX Corporation (NYSE:AVX). Mr Ibbotson boosted the position by 35%, which then comprised 1.7% of the fund’s portfolio. At the end of Q3 there were a total of 13 hedge funds investing in the stock, which is more or less a constant figure compared to previous several quarters. Among them, once again, Royce & Associates was the company’s top shareholder, holding a $54.7 million. Moreover, Citadel Investment Group, Renaissance Technologies, and Marshall Wace were also allocating huge amounts of their portfolios to the stock.

Disclosure: None.