Kahn Brothers, managed by Alan Kahn and Thomas Kahn managed to beat the market in the first quarter of 2015, a period during which the fund’s co-founder and longtime manager Irving Kahn passed away at the age of 109. Irving (pictured) was the oldest active investor on Wall Street at the time of his passing, working three times per week right into late 2014. Kahn Brothers’ 31 reported long positions in companies valued at $1 billion or greater entering the first quarter delivered weighted average returns of 2.1% based on those 13F filed positions (which may have changed over the course of the quarter).
We track funds like Kahn Brothers because our research has shown that the 15 most popular small-cap stocks among hedge funds beat the market by 95 basis points per month between 1999 and 2012. There aren’t a lot of investment strategies that can beat the market by 10 percentage points a year, so we launched our strategy and began tracking and sharing the performance of hedge fund’s 15 most popular small-cap picks since the end of August 2012. These stocks returned more than 137% since then through the end of March 2015 and dominated the S&P 500 ETF (SPY)’s 54.7% gain by more than 82 percentage points (read the details here).
Kahn Brothers’ achieved its performance in spite of big losses from two of its top picks, Citigroup Inc (NYSE:C) and BlackBerry Ltd (NASDAQ:BBRY), partially thanks to the performance of another of its top picks Pfizer Inc. (NYSE:PFE). Itstop pick was Citigroup Inc (NYSE:C), with the fund massively increasing its position in the investment bank by 869% during the fourth quarter. That brought its position to 1.19 million shares valued at $64.42 million. The big move has failed to pay short-term dividends however, despite Citigroup Inc (NYSE:C) passing the Federal Reserve’s stress test, which it failed last year. Passing the test now allows it to return capital to shareholders in the form of greater dividends and share buybacks, a development that Kahn Brothers may have been banking on. Citigroup’s top three shareholders in our database, which includes billionaires Andreas Halvorsen and Ken Fisher, all lowered their stakes during the fourth quarter, not showing the same confidence in it that Kahn Brothers did.
While Kahn Brothers had a much smaller position in BlackBerry Ltd (NASDAQ:BBRY) of 1.85 million shares valued at $20.27 million, it was equally disastrous given its extremely poor returns of -18.67% during the quarter. Prem Watsa, who also has a position in both Blackberry and Pfizer was unable to achieve the same results, as he was much more heavily invested in the Canadian technology company. That resulted in a weighted average returns quarterly loss of 8%, making Watsa’s Fairfax Financial Holdings the 11th worst performing fund of the first quarter.
Kahn Brothers’ larger position in Pfizer Inc. (NYSE:PFE) of 1.88 million shares valued at $58.66 million helped it offset a chunk of its losses in the aforementioned positions. Pfizer Inc. (NYSE:PFE) delivered returns of 12.66% during the quarter, and proved to be one of the best performing mega-cap stocks of the first quarter, delivering big returns to investors. Despite increased competition in the generic drug space, Pfizer continues to expand its drug portfolio with acquisitions, while vowing to reduce its massive R&D budget, which has pleased investors. Among those investors is billionaire Ken Fisher, and the quant fund D E Shaw.
Merck & Co., Inc. (NYSE:MRK), which also has large investments from Ken Fisher and D E Shaw, had more modest returns of 2.04% during the first quarter. Merck & Co., Inc. (NYSE:MRK) was Kahn Brothers’ second-largest position with 1.05 million shares valued at $59.79 million. Merck & Co., Inc. (NYSE:MRK) made big gains early in 2015 but gave much of them back later in the quarter following an earnings report which missed targets. Still, the pharmaceutical giant’s large pipeline of drugs, particularly those in late-stages of development, bodes well for the short-term prospects of the stock. Merck is up by just 1.48% over the past calendar year as it’s been somewhat lost in the shuffle in the red-hot biotech sector, but may be poised for a breakout move.
Lastly, BP plc (ADR) (NYSE:BP) was another large pick of Kahn Brothers’, its seventh-largest long position. Its position of 867,500 shares valued at $33.07 million accounted for 5.69% of its equity portfolio and was also the largest exposure to the stock of any fund in our database, though Richard Pzena’s Pzena Investment Management had the largest position in BP plc (ADR) (NYSE:BP), at 12.17 million shares. BP plc (ADR) (NYSE:BP) returned 4.10% during the quarter, and rumors are still swirling that the large oil & gas company could be acquired by the even larger Exxon Mobil Corporation (NYSE:XOM).
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