RLI Corp. (RLI): Hedge Funds Reversed Course

In this article we will take a look at whether hedge funds think RLI Corp. (NYSE:RLI) is a good investment right now. We check hedge fund and billionaire investor sentiment before delving into hours of research. Hedge funds spend millions of dollars on Ivy League graduates, unconventional data sources, expert networks, and get tips from investment bankers and industry insiders. Sure they sometimes fail miserably, but their consensus stock picks historically outperformed the market after adjusting for known risk factors.

RLI Corp. (NYSE:RLI) has experienced a decrease in hedge fund interest in recent months. RLI was in 15 hedge funds’ portfolios at the end of March. There were 25 hedge funds in our database with RLI holdings at the end of the previous quarter. Our calculations also showed that RLI isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 58 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. Even if you aren’t comfortable with shorting stocks, you should at least avoid initiating long positions in stocks that are in our short portfolio.

Tom Gayner of Markel Gayner Asset Management

At Insider Monkey we scour multiple sources to uncover the next great investment idea. For example, We take a look at lists like the 10 stocks that went up during the 2008 crash to identify the companies that are likely to deliver double digit returns in up and down markets. We interview hedge fund managers and ask them about their best ideas. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. For example we are checking out stocks recommended/scorned by legendary Bill Miller. Our best call in 2020 was shorting the market when the S&P 500 was trading at 3150 in February after realizing the coronavirus pandemic’s significance before most investors. Keeping this in mind let’s take a peek at the latest hedge fund action surrounding RLI Corp. (NYSE:RLI).

What does smart money think about RLI Corp. (NYSE:RLI)?

Heading into the second quarter of 2020, a total of 15 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -40% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in RLI over the last 18 quarters. So, let’s check out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

According to publicly available hedge fund and institutional investor holdings data compiled by Insider Monkey, Tom Gayner’s Markel Gayner Asset Management has the biggest position in RLI Corp. (NYSE:RLI), worth close to $105.3 million, corresponding to 2% of its total 13F portfolio. The second largest stake is held by Polar Capital, managed by Brian Ashford-Russell and Tim Woolley, which holds a $25.6 million position; the fund has 0.3% of its 13F portfolio invested in the stock. Some other peers that hold long positions comprise Chuck Royce’s Royce & Associates, Renaissance Technologies and Ken Griffin’s Citadel Investment Group. In terms of the portfolio weights assigned to each position Markel Gayner Asset Management allocated the biggest weight to RLI Corp. (NYSE:RLI), around 1.98% of its 13F portfolio. Royce & Associates is also relatively very bullish on the stock, setting aside 0.33 percent of its 13F equity portfolio to RLI.

Judging by the fact that RLI Corp. (NYSE:RLI) has experienced falling interest from hedge fund managers, it’s easy to see that there exists a select few fund managers that slashed their entire stakes in the first quarter. Interestingly, Israel Englander’s Millennium Management sold off the biggest stake of the “upper crust” of funds monitored by Insider Monkey, valued at about $17.1 million in stock. Richard Driehaus’s fund, Driehaus Capital, also dropped its stock, about $2.6 million worth. These bearish behaviors are interesting, as aggregate hedge fund interest was cut by 10 funds in the first quarter.

Let’s also examine hedge fund activity in other stocks similar to RLI Corp. (NYSE:RLI). We will take a look at Five Below Inc (NASDAQ:FIVE), ICL Group Ltd. (NYSE:ICL), Curtiss-Wright Corp. (NYSE:CW), and MSA Safety Incorporated (NYSE:MSA). This group of stocks’ market valuations match RLI’s market valuation.

View table here if you experience formatting issues.

As you can see these stocks had an average of 16.5 hedge funds with bullish positions and the average amount invested in these stocks was $173 million. That figure was $193 million in RLI’s case. Five Below Inc (NASDAQ:FIVE) is the most popular stock in this table. On the other hand ICL Group Ltd. (NYSE:ICL) is the least popular one with only 3 bullish hedge fund positions. RLI Corp. (NYSE:RLI) is not the least popular stock in this group but hedge fund interest is still below average. This is a slightly negative signal and we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 10 most popular stocks among hedge funds returned 41.4% in 2019 and outperformed the S&P 500 ETF (SPY) by 10.1 percentage points. These stocks gained 13.3% in 2020 through June 25th and surpassed the market by 16.8 percentage points. Unfortunately RLI wasn’t nearly as popular as these 10 stocks (hedge fund sentiment was quite bearish); RLI investors were disappointed as the stock returned -6.6% during the second quarter and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 10 most popular stocks among hedge funds as most of these stocks already outperformed the market in 2020.

Disclosure: None. This article was originally published at Insider Monkey.