AQR Capital Management is predominantly a quantitative equity hedge fund firm, co-founded by former Goldman Sachs portfolio manager Clifford S. Asness in 1997. Nevertheless, this investment management firm focuses on other traditional investing approaches as well. Clifford Asness is well-known for founding one of the earliest “quant vehicles” within Goldman Sachs, called the Global Alpha fund, which was later headed by Mark Carhart. Global Alpha had grown from $100 million under management to $7 billion in its first three years, while the record return reached a figure of more than 100% after fees. AQR (which stands for “Applied Quantitative Research”) Capital Management, which is one of the top hedge funds in the world when considering total assets under management, has applied mathematics to market data and made evidence-based investments across different asset classes quite successfully. Asness’ flagship Absolute Return Fund, which is the successor of Global Alpha, has generated an annualized return of 10.8% net-of-fees despite suffering destructive losses during the financial crisis of 2008 (note: the annualized return includes the three-year returns of Global Alpha). In this article we will cover three top picks of this hedge fund, identified by Asness’ and his team’s quant strategies, that include the following companies: Apple Inc. (NASDAQ:AAPL), Microsoft Corporation (NASDAQ:MSFT) and Pfizer Inc. (NYSE:PFE). As AQR is a quant hedge fund, that means these aren’t discretionary stock picks. AQR’s mathematical algorithms have been sending “undervalued” signals for these stocks. Apple and Pfizer have consistently been among AQR’s top picks but in the first quarter, Microsoft also managed to get into this group, with AQR upping its position by 42%.
Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned more than 144% over the ensuing 32 months, outperforming the S&P 500 Index by 84 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody. There are only a few hedge fund managers -quant hedge funds are disproportionally represented in this group- who can outperform the market by picking large-cap picks.
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AQR Capital increased its equity stake in Apple Inc. (NASDAQ:AAPL) by 529,740 shares during the most recent quarter. This move augmented the hedge fund’s overall position in the most valuable publicly-traded company in the world to 6.89 million shares, which are valued at $857.71 million as of March 31, 2015. One of the most captivating rumors that has been circulating around Apple is that the company intends to launch self-healing screens for new iPhones in upcoming years. This will undoubtedly boost the revenue generated from iPhones and assist the company in growing even bigger, since cracked phone screens happen far too often. Supposedly, Apple has already developed a chemical process that allows glass phone screens to heal themselves of imperfections. In the meantime, the company’s stock has risen by over 14% year-to-date. Activist investor Carl Icahn, who manages Icahn Capital, is by far the largest shareholder within our database in Apple Inc. (NASDAQ:AAPL), owning 52.76 million shares.
As mentioned, Asness increased his equity holding in Microsoft Corporation (NASDAQ:MSFT) by 42%, ending the first quarter with 13.22 million shares worth $537.46 million. Microsoft returned 14% since the beginning of the current year, while the company’s performance remains quite strong. Microsoft CEO Satya Nadella has managed to combat the company’s main problem of declining sales in personal computers since taking over the helm of the company. Although this decline in demand affects Microsoft’s financial results, the company is less dependent on PC sales now and is more focused on its commercial cloud business, which has posted 100% year-over-year growth for six consecutive fiscal quarters. Considering Satya Nadella’s expertise in building and running Microsoft’s Computing Platforms and Cloud Computing Services, it’s highly likely that the extraordinary growth of its commercial cloud business will continue further. From the pool of hedge funds that we track, Jeffrey Ubben’s ValueAct Capital represents the largest investor in Microsoft Corporation (NASDAQ:MSFT), owning 75.27 million shares.
Pfizer was AQR’s third-biggest position at the end of the first quarter. AQR Capital reported selling a stake of 995,563 shares in Pfizer Inc. (NYSE:PFE), decreasing its holding to 12.94 million shares valued at $450.11 million. The stock has grown by over 9% year-to-date and by more than 125% over the last five years. On June 15, Pfizer announced that it is taking the first steps towards building a $95 million consumer products production facility in China. The new plant will help Pfizer increase its production capacity so as to meet the fast-growing demand for the company’s brands in China. Unquestionably, Pfizer will be able to boost its revenues on the Chinese market, which will eventually help the company flourish in the upcoming years. Within our database, Ken Fisher’s Fisher Asset Management is the top investor in Pfizer Inc. (NYSE:PFE), owning 31.21 million shares.
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