How Are US Hedge Funds Positioned in UK Financial Stocks

While equities from around the world got hammered after Brexit became a reality last week, UK stocks were the ones that have suffered the most damage. The FTSE 100 Index plunged following the results and some of the prominent financial service companies based in the UK have seen a significant erosion in their market cap during that time, although they recovered in the days following the referendum as lawmakers discuss the next steps. In this post, we will be taking a look at some of the leading UK financial stocks that have been beaten down aggressively and will be discussing how the over 750 smart money investors covered by us were positioned in those stocks.

Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

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#5 Royal Bank of Scotland Group PLC (NYSE:RBS)

– Investors with long positions (as of March 31): 10

– Aggregate value of investors’ holdings (as of March 31): $32.87 million

Let’s start with Royal Bank of Scotland Group PLC (NYSE:RBS), which saw no change in its ownership among hedge funds covered by us during the first quarter, but the aggregate value of their holdings in the company nearly doubled during that period. Though shares of the banking and financial services company have been on a downtrend from the start of 2015, they have tumbled more than 30% since the Brexit result came out and are currently trading down by 48% year-to-date. On June 27, analysts from seven prominent Wall Street firms downgraded the stock, including analysts at RBC Capital who downgraded it to ‘Underperform’ from ‘Outperform’. Following the referendum, the UK government scrapped its plans of selling its stake in Royal Bank of Scotland Group PLC (NYSE:RBS) and Lloyds Banking Group (NYSE:LYG) due to economic uncertainty and turmoil in the market in the wake of the Brexit vote.

#4 OM Asset Management PLC (NYSE:OMAM)

– Investors with long positions (as of March 31): 11

– Aggregate value of investors’ holdings (as of March 31): $61.38 million

Though the number of funds tracked by us long OM Asset Management PLC (NYSE:OMAM) increased by three during the first quarter, the aggregate value of their holdings in the company came down by $25.48 million. The Brexit decision has wiped out over 11% of the market capitalization of the multi-boutique asset management company in the last few days and its stock currently trades down 14% year-to-date. OM Asset Management PLC (NYSE:OMAM) currently pays a quarterly dividend of $0.08 per share, which based on its last trading price translates into a respectable annual dividend yield of 2.43%. On June 15, analysts at Citigroup reiterated their ‘Buy’ rating on the stock, while upping their price target on it to $20 from $18, which represents a potential upside of 55.27% from the levels the stock is currently trading at.

#3 Barclays PLC (ADR) (NYSE:BCS)

– Investors with long positions (as of March 31): 12

– Aggregate value of investors’ holdings (as of March 31): $290 million

Moving on, the ownership of Barclays PLC (ADR) (NYSE:BCS) among funds covered by us remained constant, but the aggregate value of their holdings in the company jumped by $15 million during the first quarter. Hedge funds that sold their stake in the investment banking giant during that time included Clint Carlson‘s Carlson Capital. Shares of Barclays PLC (ADR) (NYSE:BCS) are currently trading down 44.42% year-to-date with nearly 35% of that decline coming in after the Brexit vote. On June 28, analysts at Goldman Sachs came out with a report in which they projected that profits of European banks can suffer a $35 billion decline by 2018 due to the economic shock of the Brexit. They also reduced their rating on Barclays PLC to ‘Buy’ from ‘Neutral’ citing, “heightened operational risk due to passporting (system that lets EU members service clients in all of the bloc’s states).”

#2 HSBC Holdings plc (ADR) (NYSE:HSBC)

– Investors with long positions (as of March 31): 14

– Aggregate value of investors’ holdings (as of March 31): $490.6 million

Amid a 18.5% decline in HSBC Holdings plc (ADR) (NYSE:HSBC)’s stock during the first quarter, the number of funds from our database long the stock increased by six, but the total value of their holdings dropped by $37.3 million. When compared to other UK-based banking companies, HSBC Holdings plc (ADR) (NYSE:HSBC)’s stock has performed relatively well in the last few days, losing only 10.7% of its value since the results of the referendum came out. However, the stock has been on a consistent decline since the start of 2014 and is currently trading at its lowest levels since the end of the financial crisis. The $0.50 per share quarterly dividend that HSBC Holdings plc currently pays despite its depressed stock price translates into an attractive annual dividend yield of almost 8.5%. JPMorgan analyst Kian Abouhossein released a note on June 27 in which he downgraded several British banks, except HSBC, which he upgraded to ‘Neutral’ from ‘Underweight’.

#1 Aon plc Class A Ordinary Shares (UK) (NYSE:AON)

– Investors with long positions (as of March 31): 30

– Aggregate value of investors’ holdings (as of March 31): $2.84 billion

Aon plc Class A Ordinary Shares (UK) (NYSE:AON) was the most popular British financial stock among hedge fund covered by at the end of first quarter. During the January-March period, the ownership of the company among funds covered by us inched up by two, however, the aggregate value of their holdings in it fell by $380 million. Hedge funds that brought down their holding in Aon plc Class A Ordinary Shares (UK) (NYSE:AON) during that period included Boykin Curry’s Eagle Capital Management, which despite lowering its stake by 2% to 13.7 million shares remained the largest shareholder of the company among funds covered by us at the end of March. Interestingly, apart from being the most popular British financial stock among US hedge funds, Aon plc is also the only stock in this list that is trading in the green for 2016, up by 19%, despite having taken a beating following the Brexit. Aon plc is expected to report its fiscal 2016 second quarter numbers next month and the consensus among analysts includes EPS of $1.38 on revenue of $2.85 billion for the quarter. For the same quarter of the previous financial year, the company had reported EPS of $1.31 on revenue of $2.80 billion.

Disclosure: None