Ken Fisher’s Fisher Asset Management boasts a massive portfolio, with the fund having 422 long positions in companies with a market cap of at least $1 billion at the end of 2014. According to our formula, which calculates the weighted average returns based on the stakes in such long positions at the beginning of the quarter, we found that Fisher’s fund returned 1.5% from those 422 positions last quarter, a small outperformance of the market (the S&P 500 returned 0.9%).
With most funds the size of Fisher’s, large- and mega-cap stocks tend to dominate the upper ranks of their portfolios in terms of value. This is certainly the case with Fisher, whose portfolio’s top ten is dominated by mega-caps. In fact the top 50 long positions in Fisher’s portfolio are comprised entirely of large- and mega-cap stocks.
While Fisher’s track record is a very good one and his picks have routinely outperformed the market as they did this past quarter, his success with a focus on large-cap stocks is an exception rather than the rule. What we have found through extensive research is that the top large- and mega-cap picks of hedge funds routinely underperformed the market, while their top small-cap picks on the other hand routinely outperformed it. This is one of the reasons why hedge funds have collectively underperformed the market over the past seven years, as the majority of their equity gets invested into large-cap positions that don’t generate the same returns as their top small-cap picks do. Our strategy based on investing in their top 15 small-cap picks has now returned over 137% through the end of March, outperforming the market by more than 82 percentage points over the past 31 months (see the details).
Let’s take a look now at the performance of some of Fisher’s largest positions during the first quarter. Given the size of his portfolio, his exposure to any one particular stock is limited, with his top holding, Apple Inc. (NASDAQ:AAPL) accounting for just 2.45% of the value of his equity portfolio, with his 10.76 million shares being valued at $1.19 billion. While that means there is less risk inherent in any one position, it also means the upside is limited as well, as evidenced by his top pick. Apple Inc. (NASDAQ:AAPL) returned 13.17% during the first quarter, which did little to impact Fisher’s overall returns. Apple Inc. (NASDAQ:AAPL)’s strong quarter had a much more profound effect on the returns of investors like Daniel Benton of Andor Capital Management and billionaire activist investor Carl Icahn, whose positions amounted to 21.09% and 18.25% of their portfolios respectively.
On the other hand, the poor quarter of American Express Company (NYSE:AXP), whose stock declined by more than 15% over the quarter, did little to harm Fisher’s slightly market-beating returns, despite being the third-largest position in his portfolio, consisting of 11.26 million shares valued at $1.05 billion. Among other things, American Express Company (NYSE:AXP) is suffering from increased competition and declining profitability per issued credit card, while the stock is already considered to be trading at a high premium, which put a good deal of pressure on it throughout the past quarter. American Express Company (NYSE:AXP)’s performance was worse news for billionaire Warren Buffett, whose $14.11 billion position of 151.61 million shares accounts for nearly 13% of his equity portfolio, the highest exposure in terms of portfolio percentage among any of the institutional investors we track.
Pfizer Inc. (NYSE:PFE) was another of Fisher’s top picks that made large gains during the quarter, contributing slightly to that market outperformance. Shares of the drug company, one of the top healthcare picks among all funds we track, rose by 12.66% during the quarter. Pfizer Inc. (NYSE:PFE) is Fisher’s fifth-largest position, the 31.20 million shares it consists of being valued at $971.77 million, and representing exactly 2% of his equity portfolio. Cliff Asness’ AQR Capital Management and Ric Dillon’s Diamond Hill Capital have the largest positions in Pfizer Inc. (NYSE:PFE) after Fisher, whose position was the largest among the funds in our database.
Two of Fisher’s other top ten picks made large moves in opposite directions during the quarter, with his eighth-most valuable position in The Home Depot, Inc. (NYSE:HD), rising by 8.79% after the home improvement retailer announced a merger with Staples, Inc. (NASDAQ:SPLS). On the other hand, Microsoft Corporation (NASDAQ:MSFT), Fisher’s tenth-largest position, fell by 11.84% during the first quarter after a very strong two-year run. Microsoft’s first earnings report of 2015 was seen as a disappointment, with earnings per share (EPS) for the fourth quarter of 2014 dipping to $0.71 from the $0.78 in EPS from a year ago.
Disclosure: None
