Madison Street Partners Reshuffles Its Portfolio and Bets on ETFs; See Its Top Stock Picks

Steven Owsley‘s Madison Street Partners recently filed its 13F form for the second quarter with the SEC. There has been significant changes in the fund’s equity portfolio, which led to a turnover ratio of 194% for the quarter, as the fund delved into passive investing and a vast majority of the top equity holdings comprised of Exchange Trade Funds (ETFs). The top stock picks coming in after a row of ETFs include Exxon Mobil Corporation (NYSE:XOM), Merck & Co., Inc. (NYSE:MRK), and Caterpillar Inc. (NYSE:CAT).

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Founded in 2004, the Denver, Colorado based fund, Madison Street Partners has about $120 million worth of regulatory assets under its management. Madison looks to invest in small and middle sized companies that are undervalued or overlooked by other investors. During the second quarter the market value of the fund’s public equity portfolio rose to $145.53 million from $98.82 million a quarter earlier.

Why do we pay attention to hedge fund sentiment. Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research has shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 123% over the last 35 months and outperformed the S&P 500 ETF (SPY) by 66 percentage points (see more details here).

During the April-June period, Madison initiated a position in Exxon Mobil Corporation (NYSE:XOM) with some 8,700 shares valued at $722,000. The downhill trajectory of oil prices has led to a nearly 20% dive in Exxon Mobil Corporation (NYSE:XOM)’s stock price on a year-to-date basis. The company reported an EPS of $1 in the second trimester, which was $0.11 short of estimates. Revenues of $74.1 billion were, however, $1.62 billion higher than the expectations. Among the funds that we track, Donald Yacktman‘s Yacktman’s Asset Management is the largest stockholder of Exxon Mobil Corporation (NYSE:XOM) with 6.92 million shares valued at $588.08 million as of the end of March.