We hate to say this but, we told you so. On February 27th we published an article with the title Recession is Imminent: We Need A Travel Ban NOW and predicted a US recession when the S&P 500 Index was trading at the 3150 level. We also told you to short the market and buy long-term Treasury bonds. Our article also called for a total international travel ban. While we were warning you, President Trump minimized the threat and failed to act promptly. As a result of his inaction, we will now experience a deeper recession (see why hell is coming).
In these volatile markets we scrutinize hedge fund filings to get a reading on which direction each stock might be going. Keeping this in mind, let’s take a look at whether Federated Investors Inc (NYSE:FII) 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.
Federated Investors Inc (NYSE:FII) shareholders have witnessed an increase in hedge fund sentiment recently. FII was in 29 hedge funds’ portfolios at the end of December. There were 27 hedge funds in our database with FII holdings at the end of the previous quarter. Our calculations also showed that FII isn’t among the 30 most popular stocks among hedge funds (click for Q4 rankings and see the video at the end of this article for Q3 rankings).
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 41 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.
Ray Dalio of Bridgewater Associates
We leave no stone unturned when looking for the next great investment idea. For example we recently identified a stock that trades 25% below the net cash on its balance sheet. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences, and go through short-term trade recommendations like this one. We even check out the recommendations of services with hard to believe track records. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s go over the key hedge fund action regarding Federated Investors Inc (NYSE:FII).
How have hedgies been trading Federated Investors Inc (NYSE:FII)?
At Q4’s end, a total of 29 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 7% from the third quarter of 2019. On the other hand, there were a total of 15 hedge funds with a bullish position in FII a year ago. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their holdings substantially (or already accumulated large positions).
According to Insider Monkey’s hedge fund database, Peter Rathjens, Bruce Clarke and John Campbell’s Arrowstreet Capital has the number one position in Federated Investors Inc (NYSE:FII), worth close to $48.5 million, corresponding to 0.1% of its total 13F portfolio. Sitting at the No. 2 spot is Samlyn Capital, led by Robert Pohly, holding a $39.7 million position; the fund has 0.8% of its 13F portfolio invested in the stock. Some other members of the smart money with similar optimism include Cliff Asness’s AQR Capital Management, Anand Parekh’s Alyeska Investment Group and Noam Gottesman’s GLG Partners. In terms of the portfolio weights assigned to each position Hourglass Capital allocated the biggest weight to Federated Investors Inc (NYSE:FII), around 1.92% of its 13F portfolio. Sprott Asset Management is also relatively very bullish on the stock, dishing out 0.94 percent of its 13F equity portfolio to FII.
As one would reasonably expect, some big names have jumped into Federated Investors Inc (NYSE:FII) headfirst. Marshall Wace LLP, managed by Paul Marshall and Ian Wace, assembled the most valuable position in Federated Investors Inc (NYSE:FII). Marshall Wace LLP had $12.8 million invested in the company at the end of the quarter. Michael Kharitonov and Jon David McAuliffe’s Voleon Capital also made a $1.1 million investment in the stock during the quarter. The following funds were also among the new FII investors: Ray Dalio’s Bridgewater Associates, Michael Gelband’s ExodusPoint Capital, and Mike Vranos’s Ellington.
Let’s now take a look at hedge fund activity in other stocks similar to Federated Investors Inc (NYSE:FII). These stocks are Corporate Office Properties Trust (NYSE:OFC), BancorpSouth, Inc. (NYSE:BXS), Home Bancshares Inc (NASDAQ:HOMB), and WNS (Holdings) Limited (NYSE:WNS). All of these stocks’ market caps are closest to FII’s market cap.
| Ticker | No of HFs with positions | Total Value of HF Positions (x1000) | Change in HF Position |
|---|---|---|---|
| OFC | 21 | 165223 | 3 |
| BXS | 14 | 63010 | 0 |
| HOMB | 12 | 14017 | 0 |
| WNS | 20 | 227803 | 1 |
| Average | 16.75 | 117513 | 1 |
View table here if you experience formatting issues.
As you can see these stocks had an average of 16.75 hedge funds with bullish positions and the average amount invested in these stocks was $118 million. That figure was $236 million in FII’s case. Corporate Office Properties Trust (NYSE:OFC) is the most popular stock in this table. On the other hand Home Bancshares Inc (NASDAQ:HOMB) is the least popular one with only 12 bullish hedge fund positions. Compared to these stocks Federated Investors Inc (NYSE:FII) is more popular among hedge funds. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks lost 17.4% in 2020 through March 25th and still beat the market by 5.5 percentage points. Unfortunately FII wasn’t nearly as popular as these 20 stocks and hedge funds that were betting on FII were disappointed as the stock returned -50.4% during the first two and a half months of 2020 (through March 25th) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 20 most popular stocks among hedge funds as most of these stocks already outperformed the market in Q1.
Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.
Disclosure: None. This article was originally published at Insider Monkey.
